Mercer Oliver Wymanâs report argues that a combination of rapid economic growth (5% GDP growth per annum); significantly reduced risk levels (brought about by improved regulation and new accounting standards); and markets under-penetrated by banking products has led to rapid growth in Emerging Europeâs financial services industry. The market has become increasingly attractive to international banks to the point that over half the banking markets in the region are 80% foreign owned.
According to Mercer Oliver Wymanâs report, âSeizing the â¬170 billion opportunity in Emerging Europe: New strategies for successâ, highest future growth from a product perspective will occur in corporate and investment banking with an estimated revenue growth of 14% per annum until 2015 through strong demand for corporate finance, transaction services and asset finance products. Retail banking will also see double digit growth levels with strong demand for private lending products reflecting expanded household consumption and increasingly âWesternisedâ lifestyles.
At a country level, the non-EU countries of Ukraine, Russia and Turkey offer the highest growth rates by some margin. Russia in particular will account for approximately 40% of Emerging Europeâs revenue potential.
Mercer Oliver Wyman argues that appetite for further investment in the region continues to be driven by a number of factors:
1. Relatively mature Western European markets which offer limited growth potential;
2. Western European banks currently hold more than â¬80 billion of excess capital, giving means and motivation to invest in growth markets;
3. Acquiring in Emerging Europe offers diversification benefits that can amount to between 10% and 20% of economic capital.
4. Successful track record of banks such as KBC and Erste in boosting their performance through building Emerging Europe portfolios.
Thomas Raab, director at Mercer Oliver Wyman, said:
âDespite the expected strong growth ratio, market share and presence is no longer enough for banks to succeed in Emerging Europe. Heavy competition and fewer acquisition targets should prompt a major strategic rethink for incumbents and new entrants alike. The region still offers many rewards for those prepared to take a more regional approach, creating portfolios of businesses which are scalable across disparate countries.â
In addition excess demand from banks looking to expand into this high growth region has led to stratospheric acquisition multiples which, according to the report, are likely to stay high and will be among the factors prompting banks to consider new strategies for the region.
Mercer Oliver Wyman predicts that there will be three new winning strategies for banks looking to build a successful presence in Emerging Europe:
1. Become a âjoined-upâ retailer. Incumbent banks will look to build fewer, larger portfolios which turn disconnected franchises into more than the sum of their parts. Sharing distribution channels, regional branding, infrastructure and product campaigns across countries will allow banks to find economic linkages across disparate markets.
2. Launch monoline attacks. New entrants and incumbents will target narrow, yet deep, revenue segments which are currently under-serviced. Early signs of this are visible in retail mortgages, consumer finance, mid-market corporate asset finance and SME banking.
3. Focus on wholesale intermediation. Rapidly growing asset pools and cash generative businesses create sizable opportunities for wholesale and investment banks concentrating on high value wealth management on the investor side and principal finance on the capital side.
Thomas Raab added:
âRussia is the only country where sizable M&A opportunities exist as an option to enter the market. The market is currently one of the hottest in the region receptive to a number of strategies and will be without any doubt the future heavyweight â representing about 40% of the overall revenue pool in Emerging Europe â yet less than 10% of the Russian banking sector is internationally owned. Despite the large presence of state owned banks we believe that there is still room for inorganic market strategies, which might need to be complemented by further organic build-out.â