Many banks around the world, and especially in the US and Europe, are struggling to develop business models which reflect radically different external constraints and which can restore a measure of stability and growth to their different operations in the aftermath of the financial crisis, according to a new report from KPMG International.
KPMG’s new report, Creating a new mould for banking, is the result of in-depth interviews with senior executives from 25 major banks and financial institutions around the world. It shows a two-tier industry whereby many banks in the developed world have been hardest hit and are having to undertake more fundamental reconsideration of their business models, while banks in Latin America, Africa and Asia have been less affected and are refining existing strategies rather than re-writing them.
Regulation, profitability and capital
The rising pressure of new regulation is a concern for all banks however, along with a continuing dramatic shortage of capital and liquidity. This is resulting in a shifting of focus from growth and revenue to prudent balance sheet management. Banks are streamlining operating models and infrastructure to squeeze out greater efficiencies and the outlook for profitability looks uncertain.
David Sayer, Global Head of Retail Banking at KPMG, said: “Banks are facing a real challenge over the returns they can bring to shareholders. The need to hold more capital will mean that profitability in terms of return on capital will decline even as profit on turnover stabilises. The impending wave of new regulation will, in one way or another, require banks to hold additional capital, impose additional costs and reduce returns.”
Consolidation and new entrants
KPMG predicts that the next stage of the reconstruction of the banking industry could see a number of divestments and acquisitions, both voluntary and in response to policymakers. Nationalised institutions will eventually return to the private sector, most likely in different forms. A wave of consolidation is likely, particularly among smaller institutions and especially in the USA; with better customer service as a differentiator. However, while new entrants to the market could pose a serious competitive threat to established players in some geographies, KPMG expects banking globally to become more, rather than less, concentrated in the next two years, as it remains a business with significant economies of scale. The mergers that have happened in the Europe and the US are indicative of this trend towards consolidation.
The executives interviewed had a spectrum of opinion on whether banks from major developing countries such as China or Brazil would be seen entering banking in Europe or North America. Some believed that circumstances are favourable — others believed that such moves would represent a distraction from the significant opportunities in their large domestic markets.
KPMG’s report also shows that the strength of the global economic recovery and banks’ role in the new financial environment are closely intertwined. Across the major economies, many banks are continuing to deleverage at a historically unprecedented rate. Despite government incentives and exhortations, this process is likely to continue to drain credit from the global economy and act as a brake on growth. Finding the right balance is critical.
Sayer commented: “Creating a new mould for banking continues to challenge the industry, in a prevailing atmosphere of constraint and uncertainty. The sheer volume of change — external, internal, strategic and operational — is itself becoming a significant agenda item. But those that have survived this far have no alternative but to continue with the process.”