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Global banks adapt to uncertain economics and regulations - Implications for bank growth and bank profitability - EY - Global

Global banks adapt to uncertain economics and regulations

Implications for bank growth and
bank profitability

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"Old business models are gone: there is no more prop trading, no more miraculous products driving profitability." – Summit participant

Stiff regulatory, political and economic headwinds banks currently face prompted a discussion on performance implications at this year's summit.

Throughout the summit, participants discussed their views on the external economic conditions in Europe and the United States, as well as the likely impact that these economic conditions and new regulations have on their banks' through-the-cycle returns on Equity (ROE) and the industry structure.

They also outlined the growth and profitability levers that their banks must use to counter the external conditions and regulatory onslaught.

None of the options are easy, but as one supervisor said after the summit, together, these levers may constitute "minimum survivor strategies." Indeed, some regulators believe bank boards and executive teams should be considering more radical change.

Will corporate banking move to the US and Asia?

During 2010's summit, directors concluded that through-the-cycle ROEs would be in the 8-12% range, with a noteworthy variance around the mean. Few at this year's summit expect higher returns than these, but neither are their views more pessimistic than a year ago, even though their banks face continued market instability, new Basel II capital rules and possible structural reform.

As a result of industry reforms and their impact on returns, many directors expect that operations would continue to move away from London and Europe more generally as activities move to where the costs are lowest.

Trends in corporate banking will also be important. One participant predicted that "corporates will consolidate with bigger banks," which will likely benefit global SIFIs. More broadly, several directors wondered if the drift of banking activities to the United States and China would precipitate, over time, a move of corporate headquarters from the United Kingdom.

A renewed focus on growth and profitability levers

Given that the regulatory and economic environment will remain challenging for the foreseeable future, summit participants concluded that both bank directors and bank management teams must put aside yearning for bygone days and instead proactively seek out opportunities to improve revenue growth and profitability.

Summit participants outlined seven ways to do so:


Develop strong business rationales for existing businesses


Realistically reduce costs


Deploy capital more dynamically and efficiently


Redesign service delivery, create strong brands and set prices appropriately


Develop new business models


Capture growth opportunities in emerging markets


Make material changes to compensation levels

Encouraging boards to consider more radical change

While it is a demanding process to pursue, many directors consider a renewed focus on growth and profitability levers to be a real step in the right direction. But do regulators agree? Some regulators believe bank boards and management teams still have not yet truly grasped the ramifications of the changes that are afoot globally.

Speaking after the summit, one supervisor challenged bank boards to think more radically and asked directors to envision possible scenarios, such as:

  • The possibility that "Balkanization by regulators could kill many cross-border, cross-currency." For example, think of European banks relying on US money market mutual funds for funding. What if regulators wouldn't allow it?

In this context, focusing on profitability levers seems necessary, but distinctively insufficient. Bank boards and management teams have some real thinking to do over the next few years and beyond.

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