Primary navigation:

QFINANCE Quick Links
QFINANCE Topics
QFINANCE Reference
Add the QFINANCE search widget to your website

Home > Sector Profiles > Banking and Financial Services

Sector Profiles

Banking and Financial Services Industry


Major Industry Trends

In its 2014 banking industry outlook, subtitled: “Repositioning for growth: Agility in a re-regulated world,” the accountancy firm Deloitte argues that after years of focusing on compliance and cost management the main priority for banks in 2014 is likely to shift to repositioning for growth. If correct, this suggests that 2014 will be a critical year for the future success of many of the world’s leading banks. There are several things that banks need to do, Deloitte argues, to position themselves for success. These are:

  • get accustomed to the new, reregulated world in which they are operating;

  • get a real grip on risk management;

  • use their capital more effectively;

  • innovate across multiple dimensions (easily said but very difficult to do);

  • keep finding ways of enhancing the customer experience.

Deloitte also argues that banks, particularly the big global banks, need to focus on developing the next generation of business leaders. Leadership will play a key role, it says, but the supreme skill for any bank going forward is to develop agility—the ability to respond deftly to changing circumstances.

Bank are under pressure as never before and new regulatory regimes continue to shape the competitive dynamics of the industry. As banks are forced to allocate large amounts of capital against certain kinds of transactions, they are tending to rethink and reevaluate the businesses that they actually want to be in. Larger banks are becoming much more rigorous in defining and focusing on their core competencies and the geographies that they see as most likely to generate the best returns. Smaller banks, for their part, are finding that regulatory pressure is driving up compliance and governance costs, to the detriment of their ability to compete. In these circumstances, consolidation is likely to be a growing trend through 2014 as smaller community banks look to gain scale through mergers.

Another trend through 2014, particularly in the United States, is likely to be some litigation by the largest banks as they seek to block regulators and legislators who want to see a clean break between banks’ proprietary dealing desks and customers’ funds. The Volcker rule, named after former Federal Reserve chairman Paul Volcker, and which seeks to ban banks from using their own funds for trading activities, was unanimously passed by all five major US regulators on December 13, 2013. The regulators in question were the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC).

However, there is considerable speculation in the United States that the Volcker rule will be challenged in court by the banks, which argue that it is impossible to distinguish between legitimate hedging activities carried out by a bank for its clients, and proprietary trading. The activities carried out in both are nearly identical, and what looks like proprietary trading to one person could just as well be argued to be no more than sensible hedging of the bank’s own positions as it provides hedges for customers—and if it profits from the transaction, well and good, since it can hardly be argued that banks should make a loss in providing a service.

Nevertheless, regulators and governments are determined to rein in speculative trading by banks. The position for the US taxpayer was spelled out very clearly by President Barack Obama, who expressed his pleasure at the adoption of the Volcker rule: “The Volcker Rule will make it illegal for firms to use government-insured money to make speculative bets that threaten the entire financial system, and [it will] demand a new era of accountability from CEOs who must sign off on their firm’s practices,” he said.

For his part Paul Volcker, who is still a highly respected figure in US Treasury and banking circles, said that the adoption of the rule that bears his name “would help in the process of restoring trust and confidence in commercial banking institutions.”

Another development that will continue through 2014 is the emergence of nonbanks as lenders to corporates. As mainstream banks reduce their lending to corporates with a C-grade investment rating, other players from outside the banking world are emerging to “cherry-pick” clients that the banks no longer want. “New risk takers—outside the classic banking system—will emerge to raise and deploy capital,” says a report from Deloitte.

The firm argues that there are compelling reasons for banks to change in 2014. Business is starting to improve, it believes, but traditional banks face a number of challenges. Margins are under extreme pressure, products are becoming more standardised (thus harder to differentiate from the competition), with mortgages being a case in point, while there are increasing regulatory concerns over the long-term outcomes for the sector from various regulatory demands.

Already there are a number of new lenders interested in providing three- to five-year loans to mid-range corporates at rates that are only slightly more expensive than traditional bank rates.

Another major trend with which banks are having to grapple is the emergence of innovative new mobile payment systems. This trend is bringing banks into direct competition with a range of new service providers. In a report on banking trends, Deutsche Bank Research points out that leading IT and software firms like Google and Apple, along with traditional payment services providers like PayPal, are all active in bringing mobile payment systems to market. Card firms, too, are repositioning themselves to take advantage of payment via mobile phones, and telecoms providers are also potential suppliers, since they have systems designed to bill at periodic intervals for small amounts.

Another major threat to banks is that customers may well decide that traditional banking services are increasingly irrelevant. The digitization of money and its disbursement electronically through the ubiquitous mobile phone represent a major threat to a bank’s traditional relationship with its retail customers and can leave bank branch networks looking woefully underutilized. Banks are going to have to respond rapidly both by building relationships with new players like Google and by “going mobile” themselves.

Back to top

Market Analysis

In its 2014 banking industry outlook, subtitled: “Repositioning for growth: Agility in a re-regulated world,” the accountancy firm Deloitte argues that after years of focusing on compliance and cost management the main priority for banks in 2014 is likely to shift to repositioning for growth. If correct, this suggests that 2014 will be a critical year for the future success of many of the world’s leading banks. There are several things that banks need to do, Deloitte argues, to position themselves for success. These are:

•get accustomed to the new, reregulated world in which they are operating;

•get a real grip on risk management;

•use their capital more effectively;

•innovate across multiple dimensions (easily said but very difficult to do);

•keep finding ways of enhancing the customer experience.

Deloitte also argues that banks, particularly the big global banks, need to focus on developing the next generation of business leaders. Leadership will play a key role, it says, but the supreme skill for any bank going forward is to develop agility—the ability to respond deftly to changing circumstances.

Bank are under pressure as never before and new regulatory regimes continue to shape the competitive dynamics of the industry. As banks are forced to allocate large amounts of capital against certain kinds of transactions, they are tending to rethink and reevaluate the businesses that they actually want to be in. Larger banks are becoming much more rigorous in defining and focusing on their core competencies and the geographies that they see as most likely to generate the best returns. Smaller banks, for their part, are finding that regulatory pressure is driving up compliance and governance costs, to the detriment of their ability to compete. In these circumstances, consolidation is likely to be a growing trend through 2014 as smaller community banks look to gain scale through mergers.

Another trend through 2014, particularly in the United States, is likely to be some litigation by the largest banks as they seek to block regulators and legislators who want to see a clean break between banks’ proprietary dealing desks and customers’ funds. The Volcker rule, named after former Federal Reserve chairman Paul Volcker, and which seeks to ban banks from using their own funds for trading activities, was unanimously passed by all five major US regulators on December 13, 2013. The regulators in question were the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC).

However, there is considerable speculation in the United States that the Volcker rule will be challenged in court by the banks, which argue that it is impossible to distinguish between legitimate hedging activities carried out by a bank for its clients, and proprietary trading. The activities carried out in both are nearly identical, and what looks like proprietary trading to one person could just as well be argued to be no more than sensible hedging of the bank’s own positions as it provides hedges for customers—and if it profits from the transaction, well and good, since it can hardly be argued that banks should make a loss in providing a service.

Nevertheless, regulators and governments are determined to rein in speculative trading by banks. The position for the US taxpayer was spelled out very clearly by President Barack Obama, who expressed his pleasure at the adoption of the Volcker rule: “The Volcker Rule will make it illegal for firms to use government-insured money to make speculative bets that threaten the entire financial system, and [it will] demand a new era of accountability from CEOs who must sign off on their firm’s practices,” he said.

For his part Paul Volcker, who is still a highly respected figure in US Treasury and banking circles, said that the adoption of the rule that bears his name “would help in the process of restoring trust and confidence in commercial banking institutions.”

Another development that will continue through 2014 is the emergence of nonbanks as lenders to corporates. As mainstream banks reduce their lending to corporates with a C-grade investment rating, other players from outside the banking world are emerging to “cherry-pick” clients that the banks no longer want. “New risk takers—outside the classic banking system—will emerge to raise and deploy capital,” says a report from Deloitte.

The firm argues that there are compelling reasons for banks to change in 2014. Business is starting to improve, it believes, but traditional banks face a number of challenges. Margins are under extreme pressure, products are becoming more standardised (thus harder to differentiate from the competition), with mortgages being a case in point, while there are increasing regulatory concerns over the long-term outcomes for the sector from various regulatory demands.

Already there are a number of new lenders interested in providing three- to five-year loans to mid-range corporates at rates that are only slightly more expensive than traditional bank rates.

Another major trend with which banks are having to grapple is the emergence of innovative new mobile payment systems. This trend is bringing banks into direct competition with a range of new service providers. In a report on banking trends, Deutsche Bank Research points out that leading IT and software firms like Google and Apple, along with traditional payment services providers like PayPal, are all active in bringing mobile payment systems to market. Card firms, too, are repositioning themselves to take advantage of payment via mobile phones, and telecoms providers are also potential suppliers, since they have systems designed to bill at periodic intervals for small amounts.

Another major threat to banks is that customers may well decide that traditional banking services are increasingly irrelevant. The digitization of money and its disbursement electronically through the ubiquitous mobile phone represent a major threat to a bank’s traditional relationship with its retail customers and can leave bank branch networks looking woefully underutilized. Banks are going to have to respond rapidly both by building relationships with new players like Google and by “going mobile” themselves.

Table 1. The world’s top 10 banks

Current rank Previous rank Bank Assets (US$ million) Change (wrt local currency) Capital (US$ million) Balance sheet date
1 1 Industrial and Commercial Bank of China, Beijing, China 2,815,042 +13.34% 56,104.37 December 31, 2012
2 2 Deutsche Bank, Frankfurt am Main, Germany 2,655,839 –7.01% 3,141.08 December 31, 2012
3 3 BNP Paribas, Paris, France 2,474,078 –5.61% 36,849.92 December 31, 2013
4 4 Crédit Agricole, Montrouge, France 2,431,518 +6.89% 9,890.46 December 31, 2012
5 5 Barclays Bank, London, UK 2,420,044 –4.65% 23,529.22 December 31, 2012
6 6 China Construction Bank Corporation, Beijing, China 2,242,254 +13.77% 40,119.87 December 31, 2012
7 7 Agricultural Bank of China, Beijing, China 2,125,352 +13.42% 52,120.48 December 31, 2012
8 8 Japan Post Bank, Tokyo, Japan 2,118,752 +2.05% 37,107.72 March 31, 2013
9 9 The Royal Bank of Scotland, Edinburgh, UK 2,084,860 –10.36% 10,728.90 December 31, 2012
10 10 Bank of China, Beijing, China 2,034,889 +7.19% 44,795.40 December 31, 2012

* and other items

Source: Accuity, accessed April 13, 2014. Accuity’s table ranks top 50 banks on basis of balance sheet information included on Bankers Almanac available at February 25, 2014.

Back to top

Further reading on the Banking and Financial Services industry

Websites:

Back to top

Share this page

  • Facebook
  • Twitter
  • LinkedIn
  • Bookmark and Share