4 minute read 10 Feb 2020
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Three common traits of high-performing banks

Authors
Jan Bellens

EY Global Banking & Capital Markets Sector Leader

Passionate leader on innovation in financial services, especially in emerging markets. Global citizen. Keen traveler.

Karl Meekings

EY Global Banking & Capital Markets Lead Analyst

Developing views on the future of banking. Fulham FC follower. Germanophile. Medievalist.

4 minute read 10 Feb 2020

The highest-performing global banks focus on resilience, commit to cost reduction and put the customer at the heart of everything.

This article is part of our Banking in the new decade series.

In 2019, banks faced the weakest global economic growth in a decade and an uptick in 2020 seems all but lost. Amid challenging market conditions, profitability is under pressure, but some organizations are still finding paths to growth.

The annual EY analysis of the world’s largest 1,250 banks has found that 350 have consistently delivered return-on-equities (ROEs) above their cost of equity over the past five years. The success of these banks, which operate across diverse markets, suggests the sector shouldn’t accept low profitability as the new normal, but should instead understand and emulate top performers.

Outperformers average five-year profitability delta

Higher performers have a strong core: focus on risk, customer and cost

The EY analysis of these exceptional banks reviews their performance through a sophisticated lens that adjusts for external factors to identify those fundamental capabilities that are common across high performers. The first of these capabilities is a clear strategy based around a clear core competence. For a small bank, this may mean focusing on a niche segment. For a large bank, this may mean the ability to deliver a blend of capabilities efficiently to a wide client group.

Exceptional banks understand their role in the financial ecosystem, allowing them to create value in highly specific ways. These banks continually improve their approach to value creation, through a laser-like focus on what they do best. They double-down on their strengths — investing to build up key capabilities that differentiate them from competitors — and consider how to partner with others in the ecosystem to complement weaknesses or provide new products and services. They know what they do well, and they don’t stray from that path.

Banks yet to define their clear competence should understand that building this vision and a plan to deliver it are priority actions but ones that take significant time to achieve. In the meantime, three other shared traits can be adopted more quickly, to help banks ride the wave of uncertainty, lift profits and free investment for transformation.

  • Methodology

    The challenge of identifying the world’s leading banks is that they have different business models and operating environments. If an Indian bank delivers better returns than an Italian bank, you can’t assume the former is better. The cost of capital of each bank may be radically different, the levels of competition in each market may vary and an array of macro factors external to the organizations may also influence performance.

    EY professionals have developed a methodology to identify outperforming organizations by adjusting for these external factors and, importantly, identifying the fundamental capabilities of these firms that have led to outperformance:

    • Step 1: We looked at more than 1,250 banks to identify those that were able to consistently deliver ROEs that were greater than their cost of equity.
    • Step 2: We identified where banking performance was principally driven by structural factors (including macro elements, such as GDP growth and banking penetration, along with industry factors such as margins, risk and competition) to ensure the exceptional performers were not simply banks that benefited from a favorable environment.
    • Step 3: We determined the key reason for these banks’ success – growth, efficiency and risk or capital management, to identify on which areas of the business they were focused to drive performance.
    • Step 4: We undertook a qualitative analysis of each of these banks to understand the capabilities that underpinned outperformance.
1. Outperformers build resilience

Success comes from a position of strength. High performers take a comprehensive approach to risk mitigation to protect the business and boost returns. They are proactive about tightening prudential credit risk management and continually assess assets to reduce risk and bolster capital strength.

Outstanding banks know how to harness the power of technology and data innovation to make better decisions about risk – or partner with those that do. And they are constantly on alert to new risks, particularly those that may damage their reputation. For example, one Norwegian bank has worked to reduce its exposure to cyclical industries – including oil and gas, and shipping – and focus on other industries to grow profits.

2. Outperformers control cost

The best banks have highly efficient processes. As most are large with sizable networks, this kind of efficiency can only result from an organizational mindset that empowers individual employees to make the right decisions without explicit guidance from management. In short, the entire organization must come together.

Outperformers typically have a mindset of continuous improvement, constantly assessing their cost base. They also display an agility that enables them to quickly respond to shifts in the market. One high-performing Mexican banking group has supercharged its efficiency by doing away with branches and instead offering specialized lending services (mostly to government entities) via business centers.

3. Outperformers are customer-centric

Many outperforming banks identify a clear customer segment and plan their entire strategy around understanding and meeting the needs of these target customers. Virtually every significant decision is geared to this goal – from developing and marketing products, allocating investments in capital and ensuring that all management behavior is driven by a focus on the customer.

Outperformers focus on developing high-quality, hyper-relevant services and experiences for target customers, rather than pushing products through traditional sales and markets.

Outperformers focus on developing high-quality, hyper-relevant services and experiences for target customers, rather than pushing products through traditional sales and markets. They continuously explore and create new offerings that better meet the needs of customers, regularly assessing service quality to ensure exceptional client experiences and drive retention.

One Danish bank rewarded customers with strong credit with a new loan structure, which was more attractive than traditional mortgage loans. The product helped the bank make up for the loss in fee income and falling interest income in traditional products. From 2013 to 2016, the bank issued US$9.3b in new home loans, while its traditional loan portfolio contracted.

Adopting your own high-performance culture

These attributes may seem fundamental, but the truth is they are poorly embedded in most banks. Even those that do seek to apply them, don’t do very well, sometimes because of efforts to adopt all three. In our experience, even high-performing banks focus on a maximum of two of these three capabilities in their business. The first challenge for banks seeking to emulate these top performers may be to determine which of their trait(s) they should adopt, in their own organization, recognizing that if they try to do them all, they will fail.

Next, leadership teams must establish the governance and culture which supports this common vision, agree the behaviors required to achieve it, and strive to execute against them. High performers are guided by long-term strategic plans, rather than switching back and forth in response to fast-moving market trends. These plans include a clear destination 10 years out and the interim measures and initiatives required to get there.

Making short-term gains to reap long-term benefits

But while it’s clear these behaviors drive long-term success, the reality may be different for those banks operating without a long-term strategic plan in a challenging market. These organizations need a short-term plan for 2020 that prepares them for this strategic shift – in essence, managing through the “now” to prepare to meet the “next” and to be ready for the “beyond.” And while it may seem that the easiest way to improve profitability is to cut costs by reducing investment in transformation programs, this is not the best approach. Instead, banks should consider what action taken now will reap both immediate and longer-term benefits.

For example, while a bank cannot redefine its core competency overnight, it can mitigate risks and strengthen resilience. A culture of continuous cost reduction takes time to nurture, but action can be taken now to free up investment in organizational transformation. Customer-centricity requires banks to invest in developing an agile mindset, but incumbents can leverage their significant advantage as trusted custodians of people’s money and data to strengthen client relationships. Organizations that work over the coming 12 to 18 months to do this will be well-positioned to drive sustained outperformance in the longer term.

Summary

Amid weak profitability, some banks are still reporting strong growth. What’s the secret of high performers – and how can other banks emulate their success? Focusing on adopting three common traits can help banks boost revenues and enable investment in transformation.

About this article

Authors
Jan Bellens

EY Global Banking & Capital Markets Sector Leader

Passionate leader on innovation in financial services, especially in emerging markets. Global citizen. Keen traveler.

Karl Meekings

EY Global Banking & Capital Markets Lead Analyst

Developing views on the future of banking. Fulham FC follower. Germanophile. Medievalist.