Q-Series: Silver wave

Asia is undergoing a demographic transformation, with the population anticipated to peak in the next 15 years; by 2050, the population aged 65+ is expected to double. These changes will lead to a rising dependency ratio and have a substantial effect on Asian economies and banking systems. For instance, if the growth of system deposits were to decelerate in a manner similar to Japan's experience, it could result in a potential decline in deposit growth of approximately USD 25tn, which equates to c40% of the current total deposit base in the region. It is essential to comprehend how the pace of these demographic changes differs across markets, recognise the uniqueness of each market, and evaluate how banks and financial institutions in those individual markets are equipped to navigate these challenges. We also present case studies on Australian superannuation, Chinese banks and insurance, and wealth management in Singapore and India to highlight how different markets are adapting to these demographic shifts.

Our analysis identifies three significant megatrends stemming from an ageing population. The first is a reduction in consumer savings, followed by a shift in asset allocation from deposits to investments, and lastly, a deceleration in the growth of consumer loans. We also examine how different economic conditions and specific policy initiatives, such as those in Singapore and China, can lead to variations from the generally observed savings patterns. Regarding loan growth, if one were to project a trajectory similar to that of Japan, the total loan growth in Asia could decrease by 1% CAGR, resulting in a "loss of loan growth" of approximately USD 28 trillion over the next decade, which represents more than half of the current loan portfolio in Asia.

The three significant trends mentioned earlier will have a direct effect on the profitability and strategies of banks in Asia. Firstly, as both deposits and lending activities decelerate, with lending experiencing a more pronounced slowdown, net interest margins of these banks are expected to enter a long-term decline. This trend appears to be evident in China and Japan. As this unfolds, banks will be forced to seek alternative income streams, driving them to shift their focus towards wealth management and insurance services. This approach has been effectively adopted by banks in Singapore over the past few years. Lastly, we can expect an increase in banking consolidation. With growing challenges, diminishing profitability, escalating regulatory demands, substantial technology investments, and ongoing pressure on profit margins, the trend towards consolidation in the banking sector is likely to intensify.

We evaluate banking markets using two scorecards based on economic and market structure metrics. Overall, we find banks in Indonesia, India, the Philippines and Malaysia appear to be more robust against demographic challenges. Conversely, banks in Thailand and South Korea seem to be facing more significant obstacles. In Singapore and Japan, banks have adapted well to demographic headwinds, while in Vietnam they have room to do more.