Posts Tagged ‘Banking Strategy’
Trends that lead to lower growth, lower profits and lower volatility for banks than during the past few decades | Deutsche Bank
This paragraph from the report below, succinctly summarises the growth prospects for Banks, and the backdrop to planning. Again, a plan that looks like the plan for 2007 is destined to fail. This is the time for breakout product design, and a dramatic cost reduction through shift to reliance on internet and online banking for a far greater breadth of service delivery.
Global banking trends after the crisis | Deutsche Bank Research
Lean years lie ahead for US banks. Performance improvements during the last 15 years have often been due to strong lending growth and low credit losses. As private households reduce their indebtedness, revenue growth in some European countries but especially the US may remain depressed for several years. With weak loan growth and a return of higher loan losses as well as a fundamentally diminished importance of trading income and modern capital market activities such as securitisation, banks may be lacking major growth drivers.
There are some dramatic proposals contained in the upcoming white paper from the Conservatrive opposition [UK] this week. They make sense and go to the core of the flexibility that allowed banks to become too speculative. They address leverage, and the investment banking/ retail banking integration challenge. The Conservatives are larely expected to win the next election, sometime in the next 12 months.
Tories say break up the big banks | The Times
He will be clear, however, that the Bank should have powers to order banks and other financial institutions to hold more capital when times are good, so that they are well-placed to cope with the losses that arise during downturns.
These counter-cyclical capital requirements, one version of which was the so-called dynamic provisioning used for Spain’s banks, are seen by Mervyn King, the Bank governor, as an essential part of the “macro-prudential” toolkit.
The most controversial part of Osborne’s proposals, however, will be his response to the “too big to fail” problem for banks. He is expected to back King’s view, set out last month, that large and complex banks that combine retail banking with risky investment banking, should either not have their deposits guaranteed by the taxpayer or be discouraged by even larger capital requirements.
Osborne will make clear that he believes some banks were allowed to become too big. He will give the Bank the powers to intervene – and, if necessary, break up – banks whose size and structure threatens financial stability.
Listening to this interview is interesting and sobering for banks. The highlighted quote below tells all.
Henry Kravis and George Roberts (KKR) | FT Interview
FT: How do you see the opportunities that have been thrown up by this incredible dislocation? Is the government a good partner for KKR?
HK: We looked at quite a few of the banks over time and we turned them down because we couldn’t see what was in the banks. Even though we were in and looking you still couldn’t see [where the bottom was]. I think there may be some programmes where it will be appropriate for us to partner with the government. One area in particular that is a very big need and an area where we will have opportunities to participate in is infrastructure.
This goes to the core of what transparency means, and to the business model of banks. i have long maintained that one fundamental negative for many banks remains their lack of investment in effective IT over a sustained period to support their growth in product diversity and merger activity.
The result is that many banks to this day, rely in Excel spreadsheets or locally managed offline databases to analyse and interpret their customer information. And worse … the assessment of holistic customer information is jeapordised because customers can show up in multiple product systems with mutiple information designs making is impossible to fully determine how many products any one customer has with that financial institution.
Relevance to Bankwatch:
it is one thing for KKR to suggest that they are not sure “where the bottom is” in the context of an economy that may be worsening and that may impact on the value of the bank product portfolio. It is quite something else to have doubts based on the value of the information offerred by the banks, and I suspect that is largely what the above quote highlights.
Deloitte pick up on an interesting characteristic of banks here. Cost cutting occurs during downturns, but its spend spend spend when things are looking good.
Banks rarely get to the point of incremental efficiencies that they note here. Citi are a classic example as noted in the FT this morning.
This fits with the view that this change we are undergoing is not just another blip before we return to business as usual. There is no business as usual coming. The future is smaller, framed in different business models, contains a greater mix of small business, and smaller companies and with retail consumers working harder, longer and for less money.
All this points to realignment of the banks’ models to be more efficient, more effective in customer interaction, and more automated, with much greater reliance on online banking and mobile banking, with less on branch banking.
This time we will not hear about ‘bricks and clicks’ as we did in 2002.
The turmoil in the financial markets, coupled with the economic downturn, is fundamentally altering the financial services environment. In this new world, improving operating efficiency has become a competitive necessity. But while financial firms have typically moved quickly to reduce costs when the business cycle is contracting, far too often these efforts have been quickly forgotten when business picks back up.
In this report, we present research conducted by the Deloitte Center for Banking Solutions demonstrating the critical importance of operating efficiency to the fortunes of financial firms. Among the findings is that building efficient operations is not enough — steady, continuous improvement in operating efficiency are required. In fact, banks that have achieved continuous improvements in efficiency have also generally experienced far greater gains in their share prices.
There appears to be little more than speculation, and floating of ideas here, but nonetheless Virgin have just announced intention to launch a direct bank in UK, and Branson has noted his broad intention to get more involved in financials services.
Something to keep our eyes on. A move such as this is good for financial services, and good for the broader industry including system vendors, such as my friends at SIT, because any new set up will need the flexibility of a web based approach coupled with solid banking and investment systems.
Virgin’s next chapter: Is now the time to bank in Canada? | Globe and Mail
In the contrarian view of Sir Richard Branson’s conglomerate, today is an opportune time to start a bank. And after floating the idea publicly more than a year ago of launching a Web-based bank for Canadians, Virgin is close to making a final decision, following news last week that it is selling its stake in Virgin Mobile Canada to BCE Inc.’s (BCE-T) Bell Mobility.
Banks are at the centre of the economy. Business and consumers conduct their day to day business using money and they do this through banks. Stating the obvious you may say? This is why I study the economy so closely and try to understand how it will look in the future, because that has a direct relation to how banks will look in that future.
We are in a crisis of debt. It is a debt crisis because consumers and businesses are over-leveraged. Their debt is too high relative to todays asset values. Asset values have decreased by 25 – 60% in the West, whereas debt has reduced only minimally.
So what do we see around us that offer substantive clues to our near term future for banks?
- US economy reducing at annual rate of 6.1% – this has to be contrasted to growth rates of 2 – 3% pre crisis, so thats an almost 10% shift being experieinced
- Lithuania today seeing a 12% reduction in its economy
- Germany seeing 5% – 6% and talk of rioting on the streets, which of course will do no good except create panic
- Citibank and Bank of America today finally wisening up to the reality that they cannot grow out of their leveraged position – they must contract out of it by selling stuff
- corporate jets becoming an embarrassment rather than a status symbol
- Allens & Overy (lawyers in the City) introducing a ‘cull’ of 10%
- 80 – 100% growth in managerial and professional unemployment (UK)
- General Motors in Canada cutting dealerships from 794 down to 400 – 400 within one year
These headlines are all point in one direction. Less is the new reality. No-one knows precisely where the new balance will level off, but it is certainly going to be at a level less thn we saw at the peak in 2007.
A smaller economic base results in less of many other things that probably still have to happen; less restaurants, real estate agents, accountants, grocery stores, plumbers, construction workers, and of course bankers and banks.
Relevance to Bankwatch:
Operating in this new environement will require new thinking and recognition of new opportunities. This will be the time (for banks) to not just accept internet but to insist on internet as a core component of the business to drive efficiencies. It will require fresh looks at old ideas that were squandered away and hidden by the excesses of the good times, eg:
- # of branches required?
- style of branches required- which services will be offerred?
- what is the the role of tellers in the new operating model?
- is it time to eliminate cheques ?
- is it time to bring commercial banking into the and up to the same degree of automation as consumer banking?
- Why is business banking still being done by cheques and deposit books?
- What is the role of Head Office? How many are required to invent bank accounts, mortgages and loans?
In a smaller and more efficient world, new competitors will be prodding away at banks’ business model. I watched many of the presentations yesterday at FinovateStartup09 and was struck by how they all in some way chipped away a part of banking from banks. Whether it is Tempo and their de-coupled debit card, or Wesabe and Micronotes pro-actively helping consumers spend wisely, or Prosper and Lending Club introducing “Securitization 2.0′ (online secondary markets with clear line of sight between debtor and creditor), the coming of Web 3.0 is imminent and in a form that banks may not expect nor be prepared for unless they act now.
The hearings are going on this morning in Washington. After my rant about Wells Fargo yesterday, it is clear to me that apparently ill timed newspaper ad on the weekend was in fact timed to coincide with these hearings. I still think it was ill timed though.
Listening to the introduction today from Barney Frank, Chairman and the commentary on CNN, the general view is that Banks are receiving money, using it for perks and not working on “getting the economy back to working again”.
On the other hand the banks are listing off how they are increasing lending, keeping people in homes granting new credit etc.
The flaw in this debate lies in the paradigm being misunderstood.
We have a temporary glitch in the economy, and must inject money to return the economy to normal. This paradigm is based on the notion that we will return to normal – normal meaning as we were before, stable GDP growth, and inflation of 1 – 2%, all with low unemployment.
They are investment oriented. Listening to State St, Bank of America, Bank of NY Mellon, they all use similar language. “Thank you” for the investment and we will ensure we provide good return on investment to our shareholders “including taxpayers [Ken Lewis BofA]“. In fact two banks described how it would repay their $3bn shortly (Morgan Stanley and one other). Morgan Stanley is listing their clients including Pepsi whom they increased lending to. Many of the CEO’s are throwing themselves on their sword including reducing salary to zero, clawing back bonuses etc.
Barney Frank – ‘why do you people (CEO’s) need to be bribed with bonuses to do your job – you are having fun, well maybe not today, why not work for a salary?’
The Flaw in those paradigms:
The flaw is this. Neither paradigm is correct, and both are short-sighted. This is the end of business as usual.
- Global debt is at an all time high relative to GDP having increased 300% over the last 20 years.
- Global assets are worth 50 – 60% of what they were worth 2 years ago – there is broad acceptance that we were in a bubble and the asset value reset is associated to income and profit levels.
- the US auto sector was insolvent (Liabilities exceeded assets) for several years prior to this crisis.
- subprime lending was a systemic flaw introducing many to home ownership, that will not be able to afford within the current lending terms and conditions
The Bank CEO’s and the Banks cannot win this argument – its an impossible argument. The reality is that banks are operating at too high debt to equity, and insufficient liquidity, and thats why they got TARP money. That is the end of business as usual.
The right paradigm:
This is the end of business as usual – cannot emphasise this enough. The right paradigm accepts the reset of asset values, accepts the implication that debt terms and conditions must be changed. The implication in the government paradigm is that banks should lend more money to unemployed people and subprime mortgage holders to allow those people to make loan payments. That won’t work.
The implication of the bank paradigm is that they will continue to make loans to an every decreasing supply of credit worthy customers. That won’t work either. This is a guarantee of a deflationary economy.
The new economic paradigm is one of higher debt to equity, higher leverage, and higher unemployment for the foreseeable future. Once this paradigm is accepted, new programmes could be considered by a joint government / bank arrangement that would work to help the situation.
The current speaker is now talking to this point in fact by suggesting that banks consider interest only loans for people rather than ‘calling’ loans which they are doing as required by their loan terms and conditions. Ken Lews is talking about untapped lines of credit.
This pink pong game between the banks who ‘are lending’ and the government who says the banks are ‘not lending’ is indicative of the mixed paradigms.
They should be discussing the nature of the economy and agreeing on the paradigm. This is such an uncomfortable hearing, it is painful. One side is speaking Swaheli and one side is speaking Mongolian.
Relevance to Bankwatch:
The government and the banks are speaking different languages. Paradigms and policies are interconnected. however policies cannot be meaningfully developed until we have agreement on the paradigm within which we are operating. That’s why we saw that Wells Fargo advertisement on the weekend and why it raised such an emotional response.
Once the new paradigm is accepted, programmes would naturally look at government guarantees, loan forgiveness, long term interest commitments – these programmes would look at moving high debt levels into manageable chunks that would allow a longer term view of the future and move people beyond worrying about next months mortgage payment. It would allow banks’ to speak the same language as the government and vice versa. More later.