Which Asian banks will lose steam amidst the silver population takeover?

India, Indonesia, and the Philippines will benefit from a favourable demographic shift whilst Korea and Japan will flounder.

The varying pace of ageing across Asia will present varying opportunities and challenges to the region’s banks with Japan and Korea poised to fare the worst, according to credit rating agency Moody’s.

On the other hand, banks in India, Indonesia, and the Philippines are net gainers from this development as they are poised to significantly benefit from the growth and wealth of prime-age populations or those aged 25-64.

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Prime-age populations constitute a bank’s core customers for banks as they are more likely to use pricier banking products such as credit cards, personal loans, mortgages and wealth management due to their larger savings and higher income than fresh graduates and retirees.

On the other hand, such populations will decline across most markets with Hong Kong leading the pack at 10% followed by Japan (9%), Taiwan (7%), Korea (6%), China (4%) and Thailand (3%), posing a threat to banking profitability.

To ride the challenging market environment, lenders from these markets may be forced to reprice their offerings by offering more attractive interest rates or fees in order to lure customers.

Japan is a prime example where banks have long been taking a blow from a shrinking labour force that has been on a steady decline since mid-2000’s. The slowdown particularly manifests to the country’s net interest margins (NIMs) which have been in protracted decline over the past years.

Unlike younger populations that utilise more expensive banking products, Moody’s notes that retirees tend to draw down in savings and focus on less risky investment products which are less profitable for banks.

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An ageing population also slows down economic growth and hit interest rates and squeeze profits from lending activities. “Slower economic activity will translate into weaker loan demand for capital spending among corporates, and small and medium-sized enterprises (SMEs), which will be detrimental to loan growth.

The wealth management business of Japanese banks have also been caving under pressure amidst falling savings rates brought about by higher dependency level.

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“Banks facing shrinking core customer bases and weakening customer demand will increase their focus on cost rationalisation, particularly in branch operations and human resources,” observed Moody’s.

Japan’s three megabanks have already announced structural overhauls to slash their headcount by over 30,000 to save up on costs.

Similarly, banks in Korea and Taiwan with fast-aging population will also come under pressure as they have high costs relative to revenue and lower returns on average assets than most other APAC systems.

“Of the seven fast-aging markets, consumer banking growth will be most constrained in Korea, because both banking penetration, as measured by the share of bank account holders in the population, and household leverage are high in the country,” added Moody’s.

Photo from Gunawan Kartapranata - Own work, CC BY-SA 3.0