Overcoming uncertainty in the banking industry

SUITS THE C-SUITE By Vicky Lee-Salas

Business World (06/19/2017 – p.S1/2)

In the last few years, the global banking industry has been dominated by significant uncertainty, and the year ahead is no different given the implications of Brexit, a new US administration in the USA, and the delays in the finalization of Basel IV regulations. Despite these factors, banks need to find ways to improve financial performance, either by growing or optimizing their business. This was the focus of the 2017 EY Global Banking Outlook survey, “Uncertainty is no excuse for inaction.” Based on the responses of senior executives from almost 300 banks worldwide, many are seeking ways to improve profitability, despite tighter budgets, continuing risks and different regulation agendas in the market. This article focuses on the survey results and implications significant to the Asian region.

Asian banks today account for 40% of total global assets compared with 27% in 2009. This is after banks in the US and Europe reduced their risk-weighted assets. Asian banks have achieved revenue growth unlike their US or European peers. However, the road ahead looks much less predictable, and several considerations need to be examined such as the rise in non-performing loans; the slowdown of the macroeconomic growth in certain Asian markets; a stronger dollar challenging global trade and capital flows; looming protectionism in most Asian economies, excluding China, India and Indonesia; and how digital disruption is challenging traditional business and operating models. The survey proposes several areas where banks can take concrete steps.

SMES AND CONSUMERS

Retail banking is one the main growth drivers in Asia. In the Philippines, small and medium-sized enterprises (SMEs) are estimated to account for about one-third of Gross Domestic Product (GDP), suggesting that there is significant room for growth and banks need to find ways to better serve the SME segment. For example, banks may provide access to credit, such as unsecured working capital loans or transaction management solutions that can improve the business. In terms of operations, banks should consider ways to enhance the customer experience through redefined segmentation, a revamp of their service models, the implementation of transformational change initiatives across the front office and support functions, and better customer communication and incentives. Another concern is the bank-customer relationship as most SMEs believe that banks are only concerned with their own interests, and not of their customers. Services offered to SMEs are often little more than variations on retail or commercial banking services. However, the new level of economic challenge and the globalization of markets point to more complex requirements that need more holistic advice and solutions. Especially today, SME clients want real-time access and faster, more personal solutions to their business needs.

The fast-evolving needs of new customers in the retail banking segment suggest that banks should leverage digital technology to meet these changing needs. The next generation of business leaders is demanding new products so banks need to develop next-generation wealth and asset management product offerings.

At the moment, digital has already made a significant impact on wealth management. Examples include the deployment of robo-adviser platforms; using online and mobile technology to provide integrated portfolio practice management and reporting solutions; data aggregation platforms that combine data from various source to provide a complete financial picture; digital utilities enabling asset managers to provide information on fund investments more easily; using front-office analytics to provide a framework for the rapid assessment of a company’s compliance assessment; and using blockchain in share trading, online trading and investor voting.

While some challenges remain, many users are seeing the critical benefits of using digital, particularly in terms of time and costs. Studies have shown that the time to provide simple financial advice can be reduced from an average of $300 in 60 minutes to $25 in 10 minutes, while blockchain-enabled trading settlement can be hastened from three days to 10 minutes.

CONTROL

Banks have recognized that regulations and control requirements have increased across Asia. While most banks have significantly improved their risk management processes in recent years, studies show that there is still much that can be done. Asian banks should continue to invest in control infrastructure that is more effective and more efficient, focus on strengthening their risk management defenses, find ways to better manage non-financial risks, and develop a sustainable response to constantly changing regulatory demands and timelines.

The survey suggests that the first step is to ensure that financial risk and performance are singularly sourced, measured, validated and reported. It also suggests focusing on vendor management and using technology or centers of excellence to improve efficiencies. These points are echoed in a recent Bank Governance and Leadership Network Viewpoints report, which states that “most banks are embracing change — reducing head count, integrating new technologies, and revamping their business models, structures, and infrastructure — but each stage of transformation brings new risks.” These include increasing exposure to third parties, system transitions that could disrupt services, more personal risk due to streamlining platforms and operations, relentless regulatory agendas, and limited resources being stretched.

PROTECT

Banks need to rebuild the public’s trust in them, especially with recent banking scandals and the ongoing threat of cyber and financial crimes. In addition to hiring compliance officers and establishing new codes of conduct and incentive structures, banks should also ensure that their systems are secure, leverage on technology to maximize internal protection, and provide adequate security training to their personnel. Cybersecurity must be included in all digital and financial technology (FinTech) agendas. Banks should also have continuing dialogue with the regulators and the public about risk culture and ethics.

OPTIMIZE

Operationally, banks can use technology to develop new operating models to improve service and reduce costs. They can also focus on optimizing customer channels, increasing the capacity for digitalization and self-service. From a strategic standpoint, banks can also look at optimizing their capital efficiency by allocating capital to their highest-return businesses and carefully managing risk-weighted assets. This is not, however, simply a short-term triage approach, but part of the shift to a forward-looking effort to optimize performance, meaningfully reduce costs and risks, increase agility, and get in on the ground when it comes to new and emerging technologies.

GROW THE BUSINESS

In recent years, achieving constant and sustained revenue growth has become a challenge due to significant macroeconomic, geopolitical and regulatory concerns. Many banks, particularly in emerging markets, have reported reduced and even negative growth. Fortunately, despite ongoing uncertainty, improvements are anticipated in 2017. Banks should take this opportunity to regain profitable growth relationships, keeping in mind that today’s consumers demand more from their banking service providers and are also increasingly turning to non-traditional financial services.

Of course, existing banks still have many advantages, such as branch networks, long-term relationships, being the trusted provider for checking accounts, etc., over the non-traditional market entrants, but studies show that those advantages are slowly eroding. This means that banks must increasingly leverage their existing advantages to protect their market share and existing client bases. They need to find ways to heighten their service quality, use analytics to identify the products and services their customers actually want, invest in front-line staff training to provide value-added experiences, and develop innovation-driven customer-centric solutions that can be delivered across multiple channels.

THE CERTAINTY OF UNCERTAINTY

Banks and companies need to accept the fact that uncertainty is the new normal in today’s global financial landscape. Given this, it is important for banks to avoid analysis paralysis and instead take concrete and proactive action to re-energize their growth agenda while still ensuring that effective and insight-driven risk management strategies are in place.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Vicky Lee-Salas is a Partner and the head of the Financial Services Organization Services of SGV & Co.