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Investing.com -- Asia is entering a period of significant demographic change, and the effects on its financial systems are expected to be significant.
According to UBS, the population across much of the region is set to peak within the next 15 years, with those aged 65 and over projected to double by 2050.
“These changes will lead to a rising dependency ratio and have a substantial effect on Asian economies and banking systems,” UBS analysts led by Aakash Rawat said in a recent note.
This ageing trend is already reshaping savings, lending, and investment behaviors. UBS identifies three major megatrends: “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.”
The cumulative effect could be profound, the bank warns. If deposit growth slows in line with Japan’s past experience, Asia may see a shortfall of roughly $25 trillion in deposit growth by 2035—around 40% of the current deposit base.
On the lending side, the impact could be even greater, with a potential “loss of loan growth” of approximately $28 trillion, equating to over half of the current loan base.
“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,” the analysts continued.
In response, many financial institutions are shifting towards fee-based services, such as wealth management and insurance. This is especially visible in Singapore, where banks have successfully grown their wealth franchises.
“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,” the report states.
Demographic headwinds will not affect all markets equally. UBS finds that Indonesia, India, the Philippines, and Malaysia are better positioned to withstand the pressures. Meanwhile, banks in Thailand and South Korea face more serious challenges.
Among individual banks, DBS Group (OTC:DBSDY) Holdings Ltd (SGX:DBSM), HSBC Holdings (LON:HSBA) PLC ADR (NYSE:HSBC), CIMB Group Holdings Bhd (KL:CIMB), and Bank Mandiri Persero Tbk PT (JK:BMRI) are seen as relatively better placed to navigate the transition.
In the face of shrinking margins, demographic strain, and the need for heavy technology investment, consolidation within the banking sector is also likely to rise. UBS expects this to follow the path seen in Japan, where the number of banks declined by 20% over two decades.