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BANKERS throughout the world are working hard to restore their balance sheets after the worst financial crisis in 80 years. Yet even during this early phase of recovery, many are already thinking ahead to what the industry will look like a few years from now.
Asia-Pacific banks have largely escaped the deeply difficult challenges faced by their counterparts in the United States and Europe. Prior to the crisis, they typically carried less risk in terms of leverage, had far less exposure to interbank lending and much lower levels of long-term debt. Post-crisis, Asian banks have lower cost-to-income ratios, leverage at roughly half the levels of the European banks, and average returns on equity that are slightly lower than pre-2007 yet nowhere near the depths from which banks in the US and Europe must now rebuild.
While the worldwide industry restructuring and shakeout offers Asia-Pacific banks opportunities to strengthen their competitive position, it is nonetheless crucial that they have a clear picture of the profound changes going on today and what kind of banking marketplace will emerge. Accenture recently conducted a global survey of banking executives, private equity firms and bank analysts to identify strategies for high performance in today's radically altered landscape.
We identified a few key trends that will reshape banking over the next few years.
New business models responding to customer pull: Most successful banks in the developed world will gravitate to a retail/commercial banking business model, organised regionally or locally. This new model will rely on pulling customers in rather than pushing products out.
By 2012, we will see less hard-selling and more tailored servicing as banks focus on target segments and get to know their customers better. It will be a simplified model, focusing more on an integrated multichannel distribution network than on branch locations.
Surviving multi-regional universal banks will be global in nature but there will be fewer of them than today. A few players will be able to operate with truly simplified global operating models pursuing economies of scale, while others will choose to simplify their businesses and become specialists on a global scale.
Non-traditional competition driving innovation: Community banks, credit unions and low-cost banks will gain market share in retail and commercial banking in the developed world. They can count on their stronger relations with retail clients and a 'fresher', innovative image. Although they will not become the dominant force, they will drive dominant players to match innovation for innovation. We expect new, nonbanking entrants - such as retailers, telecommunications operators and energy companies - to become niche players in some markets.
Emerging market players driving new market dynamics: Emerging markets, particularly in Asia, will be a hotbed of M&A activity due to the sustained momentum of their capital flows and higher rate of capital formation. Given that emerging-market banks in the BRIC countries have performed better during the crisis, they will become more important players in the future. In the next three years, however, we believe that they will expand in higher-growth domestic and regional emerging markets, and only a few will target markets in Europe and North America.
Domestic consolidation in developed markets to stem margin erosion: In the developed world, government action to stabilise the financial system has reduced the number of large bank failures. While we do not expect to see many large and cross-border acquisitions, domestic consolidation will be a feature of some overbanked markets such as the United States, Asia and Japan. Consolidation will be key to stemming the erosion of banking margins.
Cost restructuring driving higher return on equity: The new regulatory landscape and renewed appreciation of risk will cause an end to the thin-capital, high-leverage model and off-balance sheet earnings that drove high return on equity (ROE) before the crisis.
High-performance banking businesses in Europe and US will be able to achieve ROE of 15 per cent by 2012 - a considerable improvement over the current 4-5 per cent common today, but a far cry from the 26 per cent average for high performers between 2000 and 2007.
High-performance banking businesses in Asia will be able to return to ROE above 20 per cent from a current low of less than 15 per cent. To restore their own ROE levels, European and US banks will lower costs by at least 20 per cent compared to 2008 levels. Asian banks will have less scope for cost reduction, with an average cost to income ratio already 7 per cent to 21 per cent lower than their US and European counterparts.
In order to pursue growth opportunities and accommodate new business models cost-effectively, Asian banks will make at least 30 per cent of their cost base variable by 2012 through alliances, shared services and sourcing models.
Customer intelligence driving new revenue growth: Banks will embed new capabilities (eg risk analytics, customer analytics, pricing optimisation and industrialised management of nonperforming loans) into their operating models so that marketing can be pursued much more effectively. These capabilities will drive high performance through new revenue growth from offerings based on customer needs, better pricing management and new customer propositions like low-cost, aggressively priced banking.
New revenues will be generated by products such as retirement and life, health and home insurance that were not typically offered by banks before the crisis. New products will also play a role as emerging community and social markets open doors for Islamic finance, microfinance and 'green' products such as mortgages, credit cards and loans focused on sustainability. Finally, mobile technology will allow banks to reach new client segments in developed and in developing countries.
Leapfrogging the competition: Asian banks have an opportunity to leapfrog their European and US counterparts. However, trying to capture that opportunity will not be without challenges.
The move towards 'customer pull' will put pressure on Asian banks to accelerate the transformation of their distribution capabilities. Asian banks will no longer look to European and US banks for the answer but will lead the way in cleverly assembling local knowledge, technology innovation and natural growth opportunities to serve rapidly evolving consumer and commercial customers.
Low-cost direct banking, as well as integrated banking propositions such as wealth management services aimed at emerging affluence across the region, will drive Asian banks to build new operating models. The ability of some Asian banks to invest in technology will play a central role in securing their leadership in their chosen markets and in demonstrating their ability to serve complex needs through simplified operating models.
The relative strength of Asian banks provides them with a clear opportunity to profit from the struggles of troubled counterparts abroad. Learning from the crisis and adopting the best practices that emerge will ensure their gains are sustainable.
Achieving high performance by 2012 and beyond requires much more than aggressive cost cutting to make up for large write-downs and reduced earnings. In 2012 and beyond, key banking trends - marketing and customer management, strategic cost management, integrated risk management and technology-driven innovations - will be more important than ever to regain the high performance that banks seek.
Pascal Gautheron is a partner in Accenture's Asia-Pacific financial services practice. He leads Accenture's strategy practice for South-East Asia financial services
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