Asia: the future of finance
The Analyst Diaries
| 22 Jan 2019
Asia is a cradle of growth and innovation for financial services, and is poised to play a significant role in the future of the industry.
In contrast to the mature markets of Europe and North America, revenue growth opportunities abound in Asia. With a population increasing in age and wealth, together with low penetration of financial services, there is a booming market for both insurance and banking. On top of this, technology is creating additional sources of value, namely expanding markets and streamlining cost structures.
We travelled to Hong Kong and Singapore to visit the main actors in this space.
Life insurance: a continent of opportunity
Imagine a market where:
- The main obstacle to expanding your sales is the speed at which you can train new sales people
- Products consume no capital
- Only a single digit percentage of addressable market is covered
That is the landscape of Asian life insurance, in which our investments AIA and Prudential operate. Both companies sell insurance products that cover mortality and health risks, which consume little capital, owing to their statistical predictability and lack of investment risk.
Asian governments do not provide meaningful pension and health coverage to their citizens but recognize the social benefits of a robust private sector offering, so consequently regulation is supportive. Mainland China presents the biggest revenue opportunity, as the vastness of the market allies itself with low product penetration.
Digitalization: a hidden gem
With Asia at the leadership of global GDP growth, banks enjoy a supportive environment for revenue expansion. However, there are also opportunities for cost cutting.
The acceleration of cash replacement in Singapore, together with pervasive penetration of online and mobile banking, is allowing banks to reduce their branch presence significantly, eliminating a material part of their cost structure.
We met with United Overseas Bank and DBS Bank, who are on the forefront of this trend in their home market of Singapore. Whilst we are not currently holders of these companies, this kind of research meeting is vital in determining whether there is a case for us to consider investing.
Data: better data sources expand markets
As well as cutting costs, technology creates opportunities to expand addressable markets and accelerate revenue growth. For example, pervasive use of smart phones and social networks is creating vast pools of behavioural data, including on parts of the population previously ignored by the financial services industry.
With this in mind, we met LendoEFL. They use these new data pools to estimate credit risk for individuals and enterprises in markets where credit bureau information is limited or non-existent. They can sell their credit risk scoring to banks, which use this credit scoring information to find new customers in micro-finance and small and medium enterprise lending. Although LondoEFL is private and not in itself a potential investment, this technology could expand lending options for our emerging market investments, namely BDO in the Philippines and Credicorp in Peru.
Asia is allowing equity holders a glimpse into the future of finance, by mixing in the magic ingredients of growth, cost efficiency, low risk and innovation. Our clients are already benefiting from our exposure to AIA, Prudential and BDO, in which we are long-term investors. Besides these core holdings, we are watchful for new investment opportunities in the region and are likely to increase our equity exposure in the near future.