Trends: Global banking sector is healthy, says EY

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on January 29, 2018 - February 04, 2018.
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The global banking sector is in much better shape now than it was at the start of the global financial crisis 10 years ago, says EY. In its January report on the Global Banking Outlook 2018 survey, which was released this month, it says the largest banks in the world have substantially improved their capital position in the years since the crisis.

“While there is lingering debate in some corners that banks are still not sufficiently capitalised, it is undeniable that the dangerously thin buffers of the pre-crisis era — where the Common Equity Tier-1 capital ratio was below 4% for some banks — are gone as banks have raised additional equity over the last decade to almost triple their capital.

“Resilience has also been supported by the development of recovery and resolution plans as mandated by regulators globally. While it is true that the cost of compliance has risen dramatically since the crisis, at the start of 2018, we believe the industry has reached the peak of regulatory-driven investments in systems and talent.

“The progress banks have made in strengthening their balance sheets and moving past legacy conduct matters is reflected in their expectations for financial performance,” says EY. The survey finds that despite rising costs, the vast majority of bankers expect revenue and profit to improve over the next 12 months to three years.

“In fact, 12% of respondents expect more than 9% revenue growth in the next 12 months, rising to 31% over the next three years. Similarly, 7% of respondents expect more than 9% return on equity growth in the next 12 months, rising to 23% over the next three years.

“Bankers’ expectations for growth are supported by EY’s annual review of the publicly stated strategies of 30 major banks around the world. Controlling risks and protecting against internal and external threats remain important, but the greatest emphasis is on improving financial performance through growth and optimisation.”

The growing optimism of bankers and the significant shift in strategic focus would seem to point to a stronger global banking industry that may be headed for a period of sustainable double-digit ROEs. However, without a significant change in the industry, EY does not think this is likely.

 

Digital transformation high on the agenda for banks

Most banks will make the implementation of digital transformation programmes a business priority this year as the industry finds ways to evolve a decade after the global financial crisis.

According to the survey, “with 85% of banks citing the implementation of a digital transformation programme as a business priority for 2018, investment in technology to drive efficiency, manage evolving risks and benefit from growth opportunities will be critical for sustainable success”.

Almost two thirds of banks anticipate that their technology investment budgets will grow by more than 10% this year, with most citing the need to improve customer services and operating efficiencies as well as implement digital transformation programmes as the main reasons behind the investments, the survey found. The increase in budget is expected to have positive impacts on most functions, with more money available for investments in areas such as risk, compliance, IT, finance, operations and product development.

“Despite these encouraging results, we still expect that most banks will struggle to become more digitally mature over the next three years, unless they develop coherent strategies and investment plans and address legacy concerns related to poor data and disparate risk and control processes,” the survey points out.

A total of 221 institutions across 229 global markets took part in the survey, which asked banks to assess themselves against five stages of digital maturity — not pursuing, beginning, transitioning, maturing and digital leadership.

 

More than half (62%) — particularly global systemically important banks — aspire to be digital leaders by 2020, compared with only a few (19%) that consider themselves maturing or digital leaders. Digital leadership, EY notes, is required to fully capitalise on dramatically rising growth expectations.

The survey shows that 12% of respondents expect double-digit revenue growth in the next 12 months, rising to 31% over a three-year period.

With the rapid evolution of new technology, EY says many banks will have to grapple with an “innovation arms race”. There is also a high risk of getting big bets on new technologies wrong, and such failure would prove costly.

“As such, banks need to do more to embrace the shift from innovating in a silo to participating in an innovative ecosystem and collaborating with partners and peers,” it says.

The measures taken by top institutions, however, are creating a banking ecosystem that establishes the foundations for digital maturity. “Leading organisations are aggressively pursuing internal simplification and are progressively using external utilities, platforms and managed services where possible”.