pricewaterhousecoopers perspectives on trends in banking* 12 october 2006 *connectedthinking...
TRANSCRIPT
PricewaterhouseCoopers
Perspectives on Trends in Banking*12 October 2006
*connectedthinking
Presentation to the Third Bankseta International
Conference
by
Tom Winterboer
PricewaterhouseCoopers
Perspectives on Trends in Banking
Agenda/Contents
1. Introduction
2. The global banking market
3. Global Market Trends
4. So why and how are things changing?
5. Areas of strategic focus
6. And the risks – Banana Skins 2006
7. Conclusion – five action points for management
Slide 3Perspectives on Trends in BankingPricewaterhouseCoopers
12 October 2006
Position Bank name Country Assets Position by tier one, capital
1 Barclays Bank UK 1,591,524 142 UBS Switzerland 1,567,564 183 Mitsubishi UFJ Japan 1,508,541 5
4 HSBC Holdings UK 1,501,970 25 Citigroup USA 1,493,987 16 BNP Paribas France 1,484,109 247 Credit Agricole France 1,380,617 6
8 Royal Bank of Scotland
UK 1,337,512 7
9 Bank of America USA 1,291,795 3
10 Mizuho Financial Japan 1,226,627 9
TOP 10 BY TOTAL ASSETS ($M)
Source: The Banker 2006
The Global Banking Market
(South Africa: Standard Bank - $119,475m; Absa - $64,263m; Nedbank - $55,683m; FirstRand - $52,284m)
PricewaterhouseCoopers
Global Market Trends
• Retail and Commercial Banking Trends
• Capital Markets Trends
• Wealth Management Trends
• Insurance Trends
Slide 5Perspectives on Trends in BankingPricewaterhouseCoopers
12 October 2006
Retail and Commercial Banking Trends
• Market maturity and slowing growth are driving an acceleration in inter-regional and cross-border consolidation among US and European players.
• Consumer borrowing in developed nations has reached historically high levels, encouraging banks to seek growth in alternative or emerging markets;
• Corporate borrowing continues to grow at strong rates, but credit risk trends remain benign at this point in the lending cycle.
Market Trends
Slide 6Perspectives on Trends in BankingPricewaterhouseCoopers
12 October 2006
Capital Markets Trends
• Fixed income business has grown rapidly in an environment of low real interest rates, and innovation in derivatives is pushing activity to ever greater levels.
• Exceptional liquidity levels are also driving rapid developments in alternative asset classes such as commodities and private equity;
• Potential conflicts of interest and the growing importance of new types of customers like hedge funds and private equity groups are among the factors encouraging investment banks to fundamentally alter their business models.
Market Trends
Slide 7Perspectives on Trends in BankingPricewaterhouseCoopers
12 October 2006
Wealth Management Trends
• Asset gathering is accelerating rapidly in developing markets, generating growth in offshore funds. In contrast, onshore wealth managers in the US and Europe are gaining ground from traditional private banks;
• Investment management inflows are increasingly polarised between quantitative strategies and alternative products;
• Consolidation of the investment management industry is accelerating as the growing costs of research, innovation and compliance encourage players to seek economies of scale.
Market Trends
Slide 8Perspectives on Trends in BankingPricewaterhouseCoopers
12 October 2006
Insurance Trends
• The non-life insurance industry is showing improved profitability compared to historic norms, helped by better controls and improved pricing discipline. The balance sheet impact of 2005’s catastrophes has been repaired with support from capital markets;
• Life insurers are looking to participate in savings market growth. Now that solvency issues have receded the focus is on how best to use capital in order to maximise growth.
• Product mix is changing and products are evolving as life insurers pursue capital efficiency, respond to new performance measures and compete with asset managers.
Market Trends
Slide 9Perspectives on Trends in BankingPricewaterhouseCoopers
12 October 2006
Piecing the Jigsaw - The Future of Financial Services
In June 2005 PwC produced this study considering the drivers, risks and opportunities facing the financial services industry and the impact and responses for existing and potential players in the market.
In compiling this document PwC has drawn out the principle areas of commonality across different regions and territories.
So why and how are things changing?
Position for graphic or image
PricewaterhouseCoopers
So why and how are things changing?
• Piecing the Jigsaw – the Future of Financial Services
• Drivers
Slide 11Perspectives on Trends in BankingPricewaterhouseCoopers
12 October 2006
Drivers
So why and how are things changing?
Political
Demographic/ Cultural change
Economic Cycle/ Capital Markets
Regulation and Reporting
Technology
Slide 12Perspectives on Trends in BankingPricewaterhouseCoopers
12 October 2006
Political
So why and how are things changing?
Drivers
• Access• Consumer
protection• Enhanced ethical
standards/ expectations
• Stability
Risks
• Agendas• Enhanced ethical
standards / expectations
• Instability• Terrorism
Opportunities
• Globalisation• Government debt• Single market
Slide 13Perspectives on Trends in BankingPricewaterhouseCoopers
12 October 2006
Demographic/ Cultural change
So why and how are things changing?
Drivers
• Population (developed markets – greying) (developing markets – emerging middle class)
• Evolving client needs
• High performance culture
• Trust
Risks
• Consumer expectations
• Distribution• Health• High
performance culture
• Pensions
Opportunities
• Health• Population• Products• Regional
differentiation
Slide 14Perspectives on Trends in BankingPricewaterhouseCoopers
12 October 2006
Economic Cycle/ Capital Markets
So why and how are things changing?
Drivers
• Competition• Performance• Profitability
Risks
• Competitive pressure
• Performance
Opportunities
• Access to capital• Consumer
demands• Structural
change
Slide 15Perspectives on Trends in BankingPricewaterhouseCoopers
12 October 2006
Regulation and Reporting
So why and how are things changing?
Drivers
• Capital requirements
• Governance• Level & intensity• Reporting
Risks
• Compliance• Product offerings• Reporting• Tax• Transparency
Opportunities
• Expansion• Inclusion• Stability• Strategic
alignment• Transparency
Slide 16Perspectives on Trends in BankingPricewaterhouseCoopers
12 October 2006
Technology
So why and how are things changing?
Drivers
• Advances • Customer
optimisation • Distribution• Risk
management
Risks
• Adoption angst • Legacy systems
• Security
Opportunities
• Customer profiling and relationships
• Distribution• Operational
efficiencies
Slide 18Perspectives on Trends in BankingPricewaterhouseCoopers
12 October 2006
The Strategic Responses of Financial Services Companies to the Drivers of Change can be Broadly Grouped into Five Categories:
• Capital management responses include corporate simplification, a greater focus on capital allocation and share buybacks;
• Customer focus responses include distribution channel development, brand management, product innovation, targeted marketing and customer relationship management;
• Governance responses include enhancing corporate structures, compliance spending and investment in risk management;
• Operational effectiveness responses include a greater focus on value creation, improving management information outsourcing, investing in more automation, and staff training and remuneration;
• Restructuring responses include consolidation within countries and sectors, developing scale economies, stronger competition, increasing cross-border activity, and focusing on core capabilities.
Areas of Strategic Focus
Slide 19Perspectives on Trends in BankingPricewaterhouseCoopers
12 October 2006
About the Banana Skins Survey
Produced in July 2006
11th year, ranking banking risks by their perceived severity
Sponsored by PwC and conducted by David Lascelles of Centre for the Study of Financial Innovation (“CSFI”)
468 responses (440), 60 countries (54), 6 South African respondents
Many of the new respondents now come from emerging markets
Replies confidential
Slide 20Perspectives on Trends in BankingPricewaterhouseCoopers
12 October 2006
Banana Skins 2006(2005 Ranking in brackets)
1. Too much regulation (1)
2. Credit risk (2)
3. Derivatives (4)
4. Commodities (14)
5. Interest rates (12)
- “where is the next banking disaster coming
from?”
“there will be one – it is the nature of the beast!”
Andrew Hilton – Director CSFI
Slide 21Perspectives on Trends in BankingPricewaterhouseCoopers
12 October 2006
Banana Skins 2006(2005 Ranking in brackets)
6. High dependence on technology (8)
7. Hedge funds (5)
8. Corporate governance (3)
9. Emerging Markets (15)
10.Risk management techniques (9)
Slide 22Perspectives on Trends in BankingPricewaterhouseCoopers
12 October 2006
Banana Skins 2006(2005 Ranking in brackets)
11.Fraud (6)
12.Equities (18)
13.Currencies (7)
14.Macro-economic trends (10)
15.Political shocks (22)
16. Conflicts of interest (-)
17. Banking market overcapacity (20)
18. Money laundering (13)
19. Merger mania (27)
20. Legal risk (17)
Slide 23Perspectives on Trends in BankingPricewaterhouseCoopers
12 October 2006
Banana Skins 2006(2005 Ranking in brackets)
21.Business continuation (19)
22.Retail sales practices (23)
23. Insurance sector problems (11)
24.Back office (26)
25.Environmental risk (28)
26. Management incentives (21)
27. Rogue trader (24)
28. Competition from new entrants (29)
29. Payment systems (25)
30. Too little regulation (30)
Slide 24Perspectives on Trends in BankingPricewaterhouseCoopers
12 October 2006
Big movers
UP:
Commodities: price volatility
Merger mania: - sharp rise in M&A emergence of “unwieldy” groups
- resulting in oligopolistic behaviour (Malaysia & Taiwan)
Emerging markets: stability concerns
Political shocks: Iraq, N. Korea, Middle East
Equities: markets looking “toppy”
Slide 25Perspectives on Trends in BankingPricewaterhouseCoopers
12 October 2006
BananaSkins2006The CSFI’s annual survey of the risks facing banks
CSFICentre for the Study
of Financial Innovation
And the risks?
BANANA SKINS 2006
The CSFI’s annual survey of the risks facing banks
CSFI
Centre for the Study of Financial Innovation
Slide 26Perspectives on Trends in BankingPricewaterhouseCoopers
12 October 2006
Conclusion on Banana Skins
“Banks’ readiness to deal with Banana Skins – or at least the perception of their readiness-
has improved. Regulators increased their rating of bank
preparedness as well.”
Slide 27Perspectives on Trends in BankingPricewaterhouseCoopers
12 October 2006
Conclusion
Five action points for Management?
There is no single, pre-determined route to success over the coming years. As the leaders of today’s
financial institutions think about the shape of tomorrow’s leading players, their strategies should
embrace five key principles:
Slide 28Perspectives on Trends in BankingPricewaterhouseCoopers
12 October 2006
Conclusion
1. Identify and articulate what your institution does best.
A well defined corporate identity, in the minds of
customers, investors, regulators and staff, will be critical.
Whatever an institution’s core activity, it should be at the
heart of its strategy.
Slide 29Perspectives on Trends in BankingPricewaterhouseCoopers
12 October 2006
Conclusion
2. Simplify the offering to customers… Whatever its core activity, trust will be the most precious
asset. Fiercer regulatory scrutiny and a widening consumer base
means - “complexity is out & simplicity is in”. Products transparent and easy to understand; risks
clearly defined and explicitly understood; product performance reported on regularly and objectively.
Interface with the customers user-friendly above all else. Customer satisfaction metrics at the heart of
management decision-making processes.
Slide 30Perspectives on Trends in BankingPricewaterhouseCoopers
12 October 2006
Conclusion
3. … and simplify the enterprise itself. As the corporate identity and product offering need to
simplify, so will the organisation itself. Technology platforms to be consolidated and integrated. Risks should be assessed and managed on an enterprise-
wide basis. Performance data a panoramic view of the institution. Cost efficiencies will arise as a result. Silos should fade and teams collaborate. Little room for hierarchies, whether based on products or
functions, in tomorrow’s leading institution.
Slide 31Perspectives on Trends in BankingPricewaterhouseCoopers
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Conclusion
4. Hone market positioning in line with demographic trends. Whether seeking to take advantage of growth potential of
emergent middle class in developing markets, or target fast-expanding sub-populations through ethnic products and services, or pursuing life-cycle strategies aimed at tomorrow’s pensioners, successful institutions will put demographic trends at the heart of their business plans.
To drive growth effectively, a core of high-potential customers should be identified, and offering built accordingly.
Slide 32Perspectives on Trends in BankingPricewaterhouseCoopers
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Conclusion
5. Don’t forget the most important ingredient – people.
“The industry landscape may change but the importance of people is permanent”.
Need high-quality employees at all levels of the organisation.
Next few years will see two pronounced and convergent trends in employee capabilities – towards better data analysis and enhanced customer-facing skills.
Slide 33Perspectives on Trends in BankingPricewaterhouseCoopers
12 October 2006
Further information
Piecing the jigsaw: The future of financial services - http://www.pwc.com/financialservices
Banana Skins - http://www.pwc.com/banking
SA Strategic and Emerging Issues in South African Banking – http://www.pwc.com/banking
Emerging Trends and Strategic Issues in South African Insurance 2006 – http://www.pwc.com/insurance
Strategic and Emerging Issues in the South African Insurance Broking Industry 2005 – http://www.pwc.com/insurance
© 2004 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers.