Banks shift focus to growth as regulatory pressure eases

22 January 2018 5 min. read

After a decade, banks are in a better position to withstand a financial crisis similar to that of 2008, according to a new report. Following a decade of strengthening regulations and capital buffers, banks can now increasingly focus on growth, as compliance becomes standard practice.

The international financial sector was rocked in 2008, as a lack of financial regulation led to unchecked gambling of assets, which ultimately saw a domino effect cripple the global economy. Governments across the world intervened, ultimately leading taxpayers to foot the bill of bankers whose corporate culture had caused the recession, and while the stimulus packages staved off the worst possible scenarios for global capital, states executed extensive austerity packages in order to compensate for the bailouts, with wide ranging negative impacts on society.

In the fallout of the banking system’s near-collapse, various legislative measures were imposed to limit the risks that banks are permitted to take, theoretically reducing the likelihood of a similar crisis. New research from EY, titled ‘Global Banking Outlook 2018’, considers in how far banks have improved their positions, as well as strategies to move beyond crisis resilience. The research involved a survey of 221 financial institutions across 29 markets.

The lack of buffers, particularly at systematically important banks, was one factor resulting in the rapid and almost complete collapse of the financial system in 2008 – at the time tier 1 capital holdings of below 4% were not uncommon. However, since the crisis, banks have significantly increased their tier 1 capital holdings to almost 15%, while also focusing on various contingency plans in case a similar situation unfolds.

Rising capital at banks

According to the report, improved financial stability has finally allowed banks to begin to strategise additional revenue opportunities and deprioritise compliance work. Even though new landmark regulations such as the GDPR and MiFID II come into force in 2018, compliance is becoming more natural to the banking sector’s culture, while litigation from the post-crises period is also declining, as the number of unmet grievances dwindles.

In terms of the kinds of actions that banks are likely to take going into 2018, the purchase of assets in core markets is cited by 40-60% of respondents globally – with respondents in North America and the APAC developed region the most keen to invest. Access to new strategic markets was less interesting globally, at 20-40% of respondents, although 40-60% of APAC developed and G-SIBs were cited as keen.

60-80% of APAC developed respondents were also said to be keen to set up partnerships or joint ventures in core markets, while globally 40-60% of respondents concurred. Areas of little interest globally included buying assets in non-core markets and to set up partnerships or joint ventures in non-core markets.

ROE growth expectations

The increased attention away from shoring up financial clout for compliance purposes,  means that most respondents feel that they will be able to improve their Return on Equity (ROE) over the coming period. In 2018, growth will be relatively modest, at 39% of respondents projecting between 0.1-2.9% ROE and 16% between 3-5.9%. However, when it comes to the coming three years, respondents are considerably more optimistic, with 22% projecting growth of more 3-5.9% and 23% projecting growth of more than 9%. The number of respondents that expect to see a decline decreased by 3 percentage points to 17%.

Industry priorities

The research shows that the priorities of the industry between all banks and just the G-SIBs are relatively close – with considerable focus on enhanced cyber and data security (89% and 90% respectively) which will, in part, boost their capacity to meet GDPR requirements. Both types of banks are also keen to implement a digital transformation programme (85% and 82% respectively), while the recruitment, development and retainment of key talent comes in third place.

The areas of least priority include improving risk management (77% and 73% respectively), meeting compliance and reporting standards (77% and 67% respectively) and managing the threat of financial crime (78% and 76% respectively). In terms of strategy, investment in technology continues to feature. When asked what were the primary reasons for such investment, 70% cited the ‘strengthening of competitive positions and the building of market share’, 67% cited the ‘expanded ability to acquire, engage and retain customers’, and 62% said ‘generating cost saving.’

Key drivers for growth

Technology may bring mixed blessings for incumbent banks, however, with various Fintechs, particularly in the blockchain segment, increasingly eyeing their higher margin business. Bill Schlich, EY Global Banking & Capital Markets Leader, said, "Ten years after the global financial crisis, banks continue to experience increased competition from a range of new market entrants and evolving risks that challenge their ability to deliver sustainable profitability. To perform at the highest level, institutions must emerge from an era of regulatory driven transformation and develop strategies to tackle the new evolving risks that are preoccupying the C-suite.”