Transforming banks,
Global banking outlook 2014–15
Contents

2
2 Executive summary
4 Part One: The story so far
8 Part Two: Forces for change intensify
16 Part Three: Banks transformed,...
Executive
summary

Banks have been trying to restructure
themselves and rehabilitate the industry
regulatory rulebook is b...
Chart 1

Economic context — global, local, developed, emerging

Forces for change

Regulation

Customer

Technology

Compe...
Part one:
The story
so far

also initiated some reforms of the banking
emerging markets or the scale and intrusive

enough...
begins has provided time for many
economies to enact structural reforms

damaging the more effective aspects of the

the n...
Chart 2. Average ROE among top 50 global banks, 2008–13
2008

2009

2010

2011

2012

1H13

20%
18%
16%
14%

sponsored inv...
Chart 4. Total advisory and origination revenues for global
investment banks, 2009–13 (US$b)

48

46

44

43

24

FY09

FY...
Part two:
Forces for
change
intensify

structure and strategy of both banks and

of banks and the products and services

R...
Chart 7. Issues identified as most important when
considering structural changes
27

Regulatory reform
Capital and/or
liqu...
by the increasing preference for subsidiaries over branches by

Balkanization

may be reluctant to rely on a single point ...
payments direct from the customer’s account to a merchant’s

assessment of the banks’ balance sheets than the previous exe...
Chart 10.

Most important key features or
benefits sought from primary
financial service providers
35%
35%
31%

Keeps your...
savings from driving more activity to
need to be part of the broader business

raised above and it becomes clear that
the ...
more severe competition in areas such as
from regional banks looking to broaden
their reach and from global banks in searc...
Remaking financial services: risk
management five years after the crisis

increasingly focused on operational and

banks t...
Part three:
Banks
transformed,
an industry
reshaped

challenges and issues forcing the need for

and beyond?

challenge of...
Rush to execution?

for fear of missing a product recovery or underestimating the

Bank
Governance Leadership Network (EY/...
Banks in emerging markets are also suffering the effects of a

competition is intensifying and banks remain under politica...
emerging markets are approaching the
some struggle to meet customer demand for

recover some lost margin from an increase
...
are already examples of banks partnering

consider these alternative
that variable bonuses are not replaced by
are opportu...
Solutions, not products

Growth from digital

customers have much more freedom to
sponsored agenda that many banks have
is...
examples of asset managers establishing

convince them that data is handled
pension fund or insurance company may be

Rest...
permanent step-change in the cost of doing

the ultimate parent should be a bank or a

shift of emphasis as banks transiti...
Transforming cultures

necessarily have been tactical as banks try to understand the scale

there are common core values b...
large competitors may be reluctant to use another bank’s operating

processes and controls across the bank and increasing ...
strategy for the development and support of systems and

of suppliers around a core group of vendors that provide both

Sh...
industry utilities should also be explored by banks in emerging

expressing a preference to manage certain transactions di...
Final
thoughts:

an industry
rehabilitated?

28
on the cost of doing business is even more
severe and regulatory constraints have
rendered many current business models
Re...
EY | Assurance | Tax | Transactions | Advisory
About EY

Contacts
Bill Schlich

John Keller

Capital Markets Leader

Capit...
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201402 Transforming Banks, Redefining Banking

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201402 Transforming Banks, Redefining Banking

  1. 1. Transforming banks, Global banking outlook 2014–15
  2. 2. Contents 2
  3. 3. 2 Executive summary 4 Part One: The story so far 8 Part Two: Forces for change intensify 16 Part Three: Banks transformed, an industry reshaped 28 Final thoughts: an industry rehabilitated? Global banking outlook 2014–15 | 3
  4. 4. Executive summary Banks have been trying to restructure themselves and rehabilitate the industry regulatory rulebook is being completely severely constrained by regulation in see more banks transition from planning banking industry should be able to return to its core functions and support global potentially counterproductive march to on those aspects of the value chain that clarity in key areas and this certainty should prompt more banks to embark on muchneeded strategic transformation programs measure but crucial to sustainable success developing a strategy around remaining the global economy is bracing itself for the 2
  5. 5. Chart 1 Economic context — global, local, developed, emerging Forces for change Regulation Customer Technology Competition Society • New global standards challenge the profitability of business lines, particularly within corporate and investment banking divisions • Retail customers require greater transparency, personalized products and seamless transition between channels • Siloed, legacy systems struggling to cope with scale of regulatory change and an increasingly digital business environment • Regulatory requirements intensify the battle for scale and market leadership • Industry damaged by the cumulative impact of regulatory and compliance failures • Resolution plans and ringfencing require wholesale structural reforms, with regulators prioritizing stability over growth • Business customers expect banks to replace outdated systems and processes and to focus on solutions instead of “product push” • Exponential growth of data collection, analysis and storage requirements • Increased product competition from shadow banks as they exploit new technology and banking regulation • Banks struggling to embed cultural and behavioral change • National regulations threaten viability of global banking model • Uncertainty remains but tactical responses no longer viable • Markets forcing changes to product and service mix • Disruptive technologies challenging old models and providing customers with a greater choice of services and providers • All customers increasingly concerned about data privacy and cyber security • New entrants bring service and experience innovation to a range of banking, payment and lending products, threatening primacy of traditional banking relationship • End of “caveat emptor” as consumer protection legislation shifts full burden of responsibility for product suitability onto banks • Shareholder pressure to implement business models that deliver sustainable returns and reward investors Regulatory constraints — global and local Striving to comply with requirements for capital, liquidity, leverage, recovery and resolution planning, etc. Strategic assessment Transformational change required under regulatory constraints Customer relationships Organizations Infrastructure • Shift from product-centric to customer-centric models as banks strive to restore confidence Responses Business models • Greater targeting of defined customer segments that align with a bank’s competitive advantage and offer revenue growth opportunities • Processes redesigned and “leanmanufacturing” techniques adopted to deliver standardized systems and procedures across the bank • Further exits of business lines and geographies as banks streamline operations and strengthen balance sheets, leading to fewer genuinely global banks • Emergence of strong regional institutions, particularly across rapid-growth markets • Increased focus on scale and efficiency by banks in both developed and emerging markets • Universal banking redefined as more organizations explore alliances and partnership opportunities to deliver growth • Focus on rebuilding trust; new performance goals and reward strategies that reflect a more customer-centric culture • In recognition of balance sheet constraints, further collaboration with institutional customers to combine their funds with banks’ loan distribution and credit risk capabilities • Transition to a “digital first” strategy, harnessing new technology that enables customers to personalize solutions whilst ensuring data security • Tactical fixes replaced by integrated reforms that are transformational and cuts across the organization • Group structure, location strategy, booking models and legal entities reconfigured to comply with resolution requirements, optimize efficiency of capital, liquidity allocation and reduce costs • Silos and duplicative structures dismantled to improve customer focus and operational efficiency; further right-shoring likely • New processes and procedures to monitor successful embedding of cultural and behavioral changes, and to minimize risk of further conduct issues • Data systems reconfigured to meet regulatory challenges and provide business lines with customer data analytics • Additional outsourcing and greater sharing of non-core infrastructure across the industry to reduce costs and improve efficiency • Further investment in digital channels to reflect customer preferences; rationalization of physical real estate footprint Global banking outlook 2014–15 | 3
  6. 6. Part one: The story so far also initiated some reforms of the banking emerging markets or the scale and intrusive enough for outgoing Federal Reserve industry’s recovery took place amid a political crises and concerns about the But it is possible that the implementation scale and scope of regulatory reform also sent returns tumbling — particularly among by the success or failure of negotiations in Global economy — mostly on track? about beginning tapering had an almost Fears of a hard landing in China have 4
  7. 7. begins has provided time for many economies to enact structural reforms damaging the more effective aspects of the the numbers have been pressured to provide commentary faced by the banking industry have been regions have also been hit by a series of an impact on bank customers’ spending and settlements already running into the billions Regulation: bite worse than bark the comprehensive regulatory reform of the banking industry that resulted in the Basel for politicians and regulators to translate those global standards into national rules and implement other aspects of losses have enabled some banks to release local interpretation and implementation should have been a globally consistent also been distinct regional differences in of the domestic recovery and opportunities a block on efforts by banks to begin the arduous process of structural the threat of overreach by home and host authorities incorporating extraterritorial in the developed and emerging markets Global banking outlook 2014–15 | 5
  8. 8. Chart 2. Average ROE among top 50 global banks, 2008–13 2008 2009 2010 2011 2012 1H13 20% 18% 16% 14% sponsored investment programs have strengthened cross-sector 12% 10% 8% 6% 4% 2% 0% Europe Asia Pacific Americas further infrastructure investment is needed to reduce reliance on Chart 3. Average RWAs as a percentage of total assets for top 50 global banks, 2008–13 2008 2009 2010 2011 2012 1H13 70% 60% 50% 40% 30% 20% customers across many developed markets have continued to 10% 0% Europe Asia Pacific Americas there are concerns that the threat of higher interest rates once 6
  9. 9. Chart 4. Total advisory and origination revenues for global investment banks, 2009–13 (US$b) 48 46 44 43 24 FY09 FY10 FY11 FY12 1H13 Advisory and origination revenue (US$ billion) Chart 5. Total FICC and equities revenues from selected global investment banks, 2009–13 FICC (US$b) 58 52 45 48 155 125 114 98 Global Financial Stability Report noted that market losses on bond portfolios of the challenges facing banks and make the case for structural FY09 FY10 Equities (US$b) FY11 FY12 28 60 1H13 page 29 Chart 6. Y-o-Y growth in non-compensation costs vs. revenues among top 50 global banks, 2009–12 Growth in non-comp costs 60% Growth in revenue 50% 40% 30% 20% 10% 0% European banks –10% Asia-Pacific banks Americas banks –20% 2009 2010 2011 2012 2009 2010 2011 2012 2009 2010 2011 2012 Global banking outlook 2014–15 | 7
  10. 10. Part two: Forces for change intensify structure and strategy of both banks and of banks and the products and services Responses in the industry have been differentiator and disruptor over the next couple of years and beyond? 8
  11. 11. Chart 7. Issues identified as most important when considering structural changes 27 Regulatory reform Capital and/or liquidity restrictions 16 Changing customer expectations 14 12 Supervisory pressure Unclear and/or contradictory regulatory requirements 10 Number of participants ranking issue in the top 5 Chart 8. Percentage increase in capital requirements for trading book from Basel II to the combined Basel 2.5 and Basel III Remaking financial services: risk management five years after the crisis 17% 0%–50% 15% 50%–100% 38% 100%–200% 21% 200%–300% 10% Over 300% Remaking financial services: risk management five years after the crisis the banks surveyed also expected capital charges on derivatives to rise by at Chart 9. Percentage increase in capital charges on OTC derivatives for CCR alone (i.e., Basel III CCR charges, including CVA charge relative to CCR charges under Basel 2.5) 20% 0%–50% 23% 50%–100% 100%–200% 41% 16% 200%–300% Over 300% 0% Remaking financial services: risk management five years after the crisis Global banking outlook 2014–15 | 9
  12. 12. by the increasing preference for subsidiaries over branches by Balkanization may be reluctant to rely on a single point of entry approach and Many of these regulatory initiatives illustrate the seemingly 10
  13. 13. payments direct from the customer’s account to a merchant’s assessment of the banks’ balance sheets than the previous exercise key issues to protect both the relationship and the stability of their conduct is becoming a considerable force for change as many banks issue of business conduct is becoming a considerable force for change as many banks continue to reel from the effects of Under attack attacks and so they must focus on securing the data and systems and a lack of skilled staff are preventing many from delivering those Suitability customers are looking to use smartphones for a range of banking Global banking outlook 2014–15 | 11
  14. 14. Chart 10. Most important key features or benefits sought from primary financial service providers 35% 35% 31% Keeps your personal information safe Protects your financial information their customers as a result of multiple business and regulatory Provides easy access to branches and ATMs 29% Is transparent about what they charge for and makes it clear to you how to avoid paying fees 26% Offers excellent online banking features 24% Reaches out to you as soon as possible if they believe a problem may exist with your account 24% 24% Has an excellent reputation 20% 19% Works with you when you need help or encounter a problem Offers low cost banking options Handles your request quickly Chart 11. Top challenges dealing with banks Inconsistent service and pricing across geographies Outdated processes and systems Bureaucratic and inflexible 56% 35% 30% Successful corporate banking: focus on fundamentals 12 Successful corporate banking: focus on fundamentals most important issue as banks consider structural changes to their
  15. 15. savings from driving more activity to need to be part of the broader business raised above and it becomes clear that the competitive landscape is likely to look customers to buy banking products and customers and merchants to exchange losing transaction fees and prominence in competitive and regulatory pressures must lead to further reshaping if recent revenue trends are to be avoided in the future economies are attracting deposits from technology is being used to disrupt other derivatives reforms have proved to be a longer able to offer the same product range products to be traded on exchange and in emerging markets are also likely to face Chart 12. Total revenues from top 50 global banks, 2008–13 2008 US$b 800 2009 2010 2011 2012 1H13 700 600 500 400 300 200 100 0 Europe Asia Pacific Americas Global banking outlook 2014–15 | 13
  16. 16. more severe competition in areas such as from regional banks looking to broaden their reach and from global banks in search Capital and regulatory reporting to thrive and the funds to invest in the sells to customers also becoming an increasingly competitive and outsourcing arrangements to offer customers or the media — that has helped to create the environment for the other forces hope of becoming a customer’s primary the scope of their services to include more leaks and benchmark rate manipulation is Customers expect change and investors are looking for credible and sustainable of that advantage over time as they are they are distracted by the regulation and and shareholders is on the rise in both Regulation is already driving some change likely to see much more intense competition as technology and telecommunications 14
  17. 17. Remaking financial services: risk management five years after the crisis increasingly focused on operational and banks that are more transparent and bankers above, the rate of economic growth — or lack of it — will continue to be a catalyst for products and markets upon which individual banks will focus. However, while the economic outlook and opportunity will important in setting the overall strategy in the coming years. The responses that banks need to consider, and that we expect to see over the next 12-24 months and beyond, are outlined in Part Three. Global banking outlook 2014–15 | 15
  18. 18. Part three: Banks transformed, an industry reshaped challenges and issues forcing the need for and beyond? challenge of compliance has already forced banks to rethink their business models to senior banking executives across right business and operating models much more selective about the services change must go to the core of the business universal banking service to their customers technology and distribution capabilities transformed as a result and the industry 16
  19. 19. Rush to execution? for fear of missing a product recovery or underestimating the Bank Governance Leadership Network (EY/Tapestry Networks) the increasing costs of complying and competing and by falling Chart 13. Consolidation within the European banking sector 2011–13, EU27 8167 8105 8019 7965 7812 7761 2011–03 2011–09 2012–03 2012–09 2013–03 2013–09 No. of credit institutions Global banking outlook 2014–15 | 17
  20. 20. Banks in emerging markets are also suffering the effects of a competition is intensifying and banks remain under political pressure to reduce spreads on credit products to retail customers Banking in emerging markets Chart 14. Loan-deposit ratio for top 50 global banks, 2008–13 2008 2009 2010 2011 2012 abroad to support their corporate customers and serve key capital 1H13 140% 120% 100% Regulation as inspiration 80% 60% 40% exit business lines and geographies as they streamline operations 20% 0 Europe Asia Pacific Americas Full service Chart 15. Universal banking redefined — seven potential future models as alliances become more important Selectively Presence across global financial centers, international but restricted product range outside home and other core markets Strong Major business lines across multiple regional countries within a region, focused on key customer segments elsewhere Solid Full-service “universal” offering in home national market, increasingly limited operations internationally Local Small and mid-sized domestic banks retailers serving retail and business customers, primarily within part of home country Focused Core focus on particular segments e.g., specialist wealth manager, broker dealer, niche investment bank and credit cards Innovative New entrants leveraging technology and disruptors exploiting evolving industry landscape 18 Selectively international Genuinely global Strong regional Solid national Local retailer Innovative disruptor Focused specialist Niche Genuinely Truly international in coverage and global product depth, though less full-service and globally universal than pre-crisis Range of offerings/services Seven potential future models Size of bubble reflects number of institutions Local National Regional Scale of coverage Global
  21. 21. emerging markets are approaching the some struggle to meet customer demand for recover some lost margin from an increase rather than retaining sub-par business units Universal 2.0 Japanese banks taking strategic stakes in selectively international banks in markets management into more vanilla savings and genuinely global or strong regional banks to partnership to emerge across all markets as become solid national banks are less able to and support their customers across different to those local or national banks that are adopted this approach and focus on the and exploit their competitive advantages to satisfy every aspect of customer demand Chart 16: Effect of combined liquidity and capital changes under Basel III on business models 2012 2013 62% Evaluating portfolios 81% 43% Shifting out of complex less liquid instruments 44% 29% Exiting lines of business 44% 13% Exiting geographies None of the above 17% 17% 8% Remaking financial services: risk management five years after the crisis Global banking outlook 2014–15 | 19
  22. 22. are already examples of banks partnering consider these alternative that variable bonuses are not replaced by are opportunities here to develop much- of the value chain they to see more banks looking at opportunities elements of the overall customer relationship on restoring credibility and regaining and ensuring that adoption of the broader regulatory agenda supports efforts to Which customers? For banks that need to consider these have tried to be all things to all customers are investing in data analytics to develop value of a customer’s overall relationship collaborative approach is a strategy that take that step and focus on a smaller on a technology-enabled self-service 20
  23. 23. Solutions, not products Growth from digital customers have much more freedom to sponsored agenda that many banks have is recognition that too many sales staff focus on articulating and embedding a more banks ensure that internal target-setting and record than most banks of using customer trust and developing long-term relationships experiencing better complaints handling from other sectors; improving effectiveness the priority should be on enabling more compliance as long as it resulted in a better Chart 17. Percentage of customers willing to provide their bank with more personal information also expect banks to learn from others and Yes 70% Global Consumer Banking Survey: The customer takes control yet many lack the data analytics capabilities to turn this into a competitive advantage the security of personal information is a Global banking outlook 2014–15 | 21
  24. 24. examples of asset managers establishing convince them that data is handled pension fund or insurance company may be Restructuring for business customers multinational corporations are concerned about consistency of service across markets Banks have the customer base and the skills in loan origination and credit risk customers rather than products and the speedy and effective resolution of to lend or the capacity on the balance became clear during that survey that many of these customers don’t expect a single expect to see more examples of banks become more targeted in both their product companies secure funding from debt and and services from both sides of a potential Customers as collaborators location strategy in the coming months and Chart 18. Does your company plan to refinance loans or other debt obligations in the next 12 months? Yes 26% October 2012 22 Yes 29% April 2013 Yes 35% October 2013
  25. 25. permanent step-change in the cost of doing the ultimate parent should be a bank or a shift of emphasis as banks transition from separate operating entities to manage to streamline legacy — and often overly Banks must also adapt to restrictions on the ensure resolution plans can be executed unnecessary entities to improve capital comply and the cost implications may Streamlining structures able to remove duplicate management be restricted to capital markets and Chart 19. Potential global capital requirements* 19 6 20 3 20 3 Resolution buffer (including bail in bonds) Additional loss absorbing capital (including bail in bonds) Progressive buffer (low triggering co-cos) High triggering co-cos Non-equity capital (T1+T2) 3.5 15.5 3.5 10.5 3.5 13 3.5 2.5** 2.5 2.5 2.5 4.5 4.5 4.5 Basel 3 minimum Basel G-SIB CRD IV Additional common equity (systemic/ring-fence buffer) Common equity capital conservation buffer Minimum common equity 3 5 4 10 2 2.5 5.5 India 3 3.5 3 13 3.5 3.5 2.5 9.5 2.5*** 2.5 2.5 2.5 2.5 4.5 4.5 4.5 4.5 Switzerland ICB Proposal UK ICB Proposal UK G-SIB group (UBS and Credit Suisse) (ring fenced) US 10.5 3.5 2.5 2.5 5 China 8 3.5 4.5 Japan**** 2.5 4.5 Australia (non ring fenced) Bank for International Settlements, national regulators Global banking outlook 2014–15 | 23
  26. 26. Transforming cultures necessarily have been tactical as banks try to understand the scale there are common core values but cultural variations among process is ensuring that changes have been embedded throughout on this area to strengthen internal transparency and thereby reduce Connecting to shared services 24
  27. 27. large competitors may be reluctant to use another bank’s operating processes and controls across the bank and increasing levels of Silos dismantled Emerging markets not exempt Banks across a number of emerging markets have embarked become much more common if costs are to be brought under be a crucial investment area in the short to medium term to architectures and an army of staff to Global banking outlook 2014–15 | 25
  28. 28. strategy for the development and support of systems and of suppliers around a core group of vendors that provide both Sharing is good and use more sophisticated data analytics to strengthen customer Chart 20. Breakdown of bank IT spend Maintainance Investments 51.3 7.7 2012 51.5 7.7 2013 51.8 7.7 2014 51.9 7.7 Europe 2011 52.2 2015 2011 Asia 2012 2013 39.5 16.5 41.5 17.8 43.7 Americas 2013 2014 2015 26 19.6 49.7 2015 2012 19.2 46.9 2014 2011 7.7 40.7 20.5 12.8 41.5 42.8 43.9 45.1 13.2 14.1 15.5 16.8
  29. 29. industry utilities should also be explored by banks in emerging expressing a preference to manage certain transactions digitally obviate the need for investment in physical servers and storage for advice on complex solutions rather than to manage simple providers and industry utilities may also be more secure than Chart 21. Smartphone penetration by region (as percentage of population) 2011 2012 2013F 2014F 2015F 2016F 2017F 120% 100% 80% 60% 40% 20% 0 North America Latin America Europe Middle East and Africa Asia Pacific “Mobile phone and Smartphone forecast 2013–2017,” Global banking outlook 2014–15 | 27
  30. 30. Final thoughts: an industry rehabilitated? 28
  31. 31. on the cost of doing business is even more severe and regulatory constraints have rendered many current business models Responses necessarily cut across business to redesign compensation models as banks Customers expect to be treated fairly but industry that can generate sustainable economic recovery in both developed and banks to develop mechanisms and tools to tangible aspects of reform such as culture are bringing to banking the sort of change strengthen their reputations and recover Banks don’t necessarily need to imitate in an attempt to compensate for not being a advantage by developing an understanding markets and functions as universal banking Methodology EY maintains a database of banking key performance indicators. The database covers the top 50 banks by assets, as listed by The Banker Database at July 2013. Data is drawn from company reports. Data for revenues, costs, loan loss provisions, net interest margins, earnings per share and core tier one capital are as reported. Other figures are calculated to ensure a consistent methodology. Where no data is recorded, the reporting bank is excluded for that metric. Major outliers are also excluded to avoid distortion. Where necessary, balance sheet and income statement data have been converted to US dollars using exchange rates from OANDA (oanda.com). The following banks were included in the analysis of investment banking revenues: Barclays, BNP Paribas, Bank of America, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase, Morgan Stanley, Nomura, Royal Bank of Scotland, Société Générale and UBS. Global banking outlook 2014–15 | 29
  32. 32. EY | Assurance | Tax | Transactions | Advisory About EY Contacts Bill Schlich John Keller Capital Markets Leader Capital Markets Leader Ian Baggs Steve Ferguson Capital Markets Leader London deliver help build trust and confidence in the capital Capital Markets Leader +61 2 9248 4518 About EY’s Global Banking & Capital Markets Center Jan Bellens Robert Cubbage Markets Leader Capital Markets Leader London array of divergent stakeholders is a key goal of banks and Noboru Miura Steven Lewis Capital Markets Leader Capital Markets London ey.com

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