Banks under the gun: E&Y

The year ahead is one of uncertainty for many banks, with the implications of Brexit for the UK and the European Union unclear, the election of Donald Trump as President of the US raising questions about the future direction of banking regulation and European pushback on so-called “Basel IV” regulations driving delays in finalising those rules.

Profit trends may strengthen in 2017 — particularly for US banks, which are positioned to benefit from higher interest rates and the recovery in consumer and business confidence that followed the US election, according to the EY Global Banking Outlook 2017.

However, the sustainability of improved trends in the operating environment — and how transferable these improvements are to banks in other advanced economies and the emerging markets — remains uncertain, the financial advisory firm found.

The consultant is expecting 2017 to be the year that banks increasingly look for ways to improve their Return-on-Equity.

After interviewing senior executives at almost 300 banks across Europe, the Americas, Africa and Asia-Pacific, the financial advisor said while strategic priorities vary across regions, many are focused on “making things better” by growing and optimizing their business.

While only 11 per cent of banking executives actually expect their financial performance to improve significantly over the next 12 months, a solid 60 per cent are investing in new customer-facing technologies, the report found.

Further, the consultant believes it possible for banks to reconcile conflicting priorities to improve their financial performance, while also enhancing their control and protection agenda.

The survey identified two priorities for growth: recruiting and retaining talent and investing in new customer-facing technology. Dai Bedford, EY Global Banking & Capital Markets Advisory Leader, said: “Banks realise that they cannot wait for a return to normalcy to achieve meaningful profitability. The industry must innovate to grow or optimise their business so they can be more efficient while also meeting the needs of regulators.”

The report encouraged banks to streamline operating models and partner with fintechs, blockchain firms and other industry disruptors to deliver better services, and to be relentless in driving out costs and managing risks that help protect the organisation.

Karl Meekings, E&Y banking and capital markets analyst, noted: “The key to success will be building a better ecosystem, not a bigger bank. Institutions must look for alternative ways to be organised and to operate; to have a much thinner spine than they have today.”

Managing reputational risk and meeting regulatory compliance and reporting standards are top of the agenda for the world’s biggest lenders.

Yet, the consultant expects that the significant compliance effort — and investment — is unlikely to be offset by a surge in revenue growth.

In addition, the introduction of total loss-absorbing capacity (TLAC) as a resolution tool brings an explicit recognition that investors will be “on the hook” if things go wrong; the associated implications of this for credit ratings and cost of capital will likely exacerbate banks’ challenges in improving profitability.

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