China could leapfrog the United States to become the world's largest banking economy by 2023, 20 years earlier than expected, raising pressure on western banks to brush off the effects of the credit crisis and head east.
According to a report published by consultants PricewaterhouseCoopers (PwC) on Friday, India is expected to leapfrog Japan to rank third in terms of domestic banking by 2035 - and could pass China as its population rapidly ages.
PwC's chief economist John Hawksworth urged current banking leaders, whose power has been sapped by the credit crisis, to heed the accelerating shift in global economic power and claim a share of emerging markets' relatively unbanked populations.
"With populations of well over a billion each, access to markets like China and India is critical for growth," he said.
Chinese banks already dominate global rankings by market value, and some lenders have already secured heavy emerging market exposure to tap into booming demand for financial products from young and increasingly wealthy populations.
Banks in the fast-growing emerging markets (E7) of China, India, Brazil, Russia, Mexico, Indonesia and Turkey have been relatively shielded from the financial crisis that brought many western peers to their knees and sent asset values plunging.
With watchdogs determined to rein in institutions that presided over an exuberant era of high-risk expansion that culminated in a rash of taxpayer-funded bailouts, western banks are also contending with tough new regulations, which are curbing lending growth, while domestic populations age.
PwC, which based its report on projections for GDP and domestic credit and used net interest margins as a measure of profit, said E7 growth hinged on state investments in infrastructure, opening markets to fresh competition, reducing bureaucracy and budget deficits and increasing rural education.
It predicts that global banking assets could quadruple to around USD 300 trillion by 2050, with the GDP of the E7 level pegging with the G7 nations of the United States, Japan, Germany, the UK, France, Italy and Canada within the next two decades and well ahead within the next four.
Britain, which it ranks fourth in terms of domestic banking assets, is expected to be pushed into fifth place by India within the next 20 years before fast-growing Brazil is likely to push it down another notch by 2050, PwC predicted.
But investing in emerging markets can be an uphill struggle.
"The E7 doesn't need the G7 for capital, decision making or consumers, so the established economies will have to make a strong case to convince new economy policy makers of the benefits of inviting foreign competition in," Hawksworth noted.