Despite rising inflation, the continued fragility of the global economy will likely see interest rates remain very low for the foreseeable future which poses a threat to banks because of the income they derive from the net interest margin between deposits and loans.
This is the view of GlobalData which said that banks that are primed to succeed over the next five years in the face of compressed net interest margins are those that have lowered their cost-to-income ratio and decreased the proportion of revenue reliant on net interest income.
“As the impact of the pandemic is expected to be with us for at least the next half-decade, banks will have to evolve and adapt to expand into new sectors and offer services that fall outside the traditional banking remit,” the data analytics firm added.
GlobalData argued that these changes have huge significance for retail banks given that the average bank earns approximately 80 percent of its revenue from interest income, making them hugely reliant on interest margin which is the spread between the rate they lend at and the rate they pay on deposits made.
“What we are seeing from the most innovative banks around the world is intent to become more like technology companies whereby they offer platforms and marketplaces to their customers, make better use of data and technology to offer superior levels of service and security; all of which enables them to generate new streams of revenue that are not dependent on interest rates, that often also augments existing streams of revenue by encouraging the use of traditional banking products and services,” said Mohammed Hasan, a GlobalData analyst.
“The pandemic has enabled many banks to close the gap between them and competitors, who were further ahead in adapting to the macroeconomic climate, as banks of all sizes have been able to close inefficient branch networks and move toward streamlined digital operating models.”
Winners and losers
Hasan pointed to DBS in Singapore, Sberbank in Russia, Bank of America in the US, TD Canada Trust in Canada, and BBVA in Spain and Latin America as having established themselves as leaders in adapting to the changing environment by investing in the value chain of the future, reducing their costs and improving efficiencies.
At-risk banks include those that have undiversified streams of revenue and high cost-to-income ratios, such as Sparkassen in Germany, Nationwide in the UK, and Permanent TSB in Ireland, he added.
“As technology companies move further into financial services and banking it remains to be seen how well banks can move in the other direction and capture value from e-commerce, social media, data analysis, and business services,” added Hasan.