Balancing performance against growth – 60% of banks plan to invest in new technologies as market challenges persist

Singapore, 22 March 2017

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  • Banks need to incorporate a five-step approach to improving profitability.
  • Banks in ASEAN share similar priorities, with some market variations.

While only 11% of banking executives globally expect their financial performance to improve significantly over the next 12 months, 60% of banks see the need to invest in new customer-facing technologies to spur growth, according to the EY Global Banking Outlook 2017.

This study of senior executives was conducted among almost 300 banks across Europe, the Americas, Africa and Asia-Pacific (including Australia, Japan, Hong Kong and Singapore, and the emerging markets of China, India, Indonesia and Malaysia).

With current sentiments dampened by generally weaker economic climates, banks’ immediate priorities center around a defensive “protect and control” mode as they focus on building an agile and sustainable business model for the future.

Of the global respondents, 69% and 66% respectively indicated managing reputational risk, and meeting regulatory compliance and reporting standards as the top two strategic priorities in 2017. This reflects a magnified emphasis on strengthening risk profiles and culture while meeting corporate governance obligations.

The survey also identified two key growth agendas globally: recruiting and retaining talent (63%) and investing in new customer-facing technology (60%). The first initiative appears especially critical for Asia-Pacific institutions as management seeks to secure talent, raise employee engagement and ensure that labor resources are in place to capture growth opportunities, particularly for front-line and digital-related undertakings.

Jan Bellens, EY Global Emerging Markets Leader, Banking & Capital Markets, stresses that banks cannot simply wait for a return to normalcy in order to achieve meaningful profitability. “In the current environment, the global banking industry must innovate in order to grow, institutions need to seek alternative ways to reshape, organize and optimize their businesses, while concurrently meeting regulatory obligations and actively engaging customers,” he says.

Common priorities with some market variations in ASEAN

Generally in the Asia-Pacific region, enhancing cybersecurity and data security, and meeting capital, liquidity and leverage ratio requirements take precedence as most critical to protecting and controlling the banks’ businesses in the coming year.

There are some slight variations in the focus for banks in Asean. In Singapore, banks are emphasizing on recruiting and retaining key talent, followed by risk management improvements, new customer-facing investments, balance sheet optimization and gender diversity promotion on the management board.

In Malaysia, banks are prioritizing risk management, and asset quality and credit risks improvement, and the ability to meet capital, liquidity and leverage ratio requirements.

In Indonesia, banks are focused on enhancing data and cybersecurity, financial crime management, ways to optimize customer channels and improvements to their risk management, asset quality and credit risks processes.

Bellens explains: “Banks in developed markets are focused more on talent recruitment and retention, and cybersecurity enhancements, while those in emerging markets emphasize more on improvements in risk management, asset quality and credit risks. For the former, it is likely due to increasing competition from the non-banks or FinTechs for talent. For the latter, it reflects their state of development in terms of the banking platforms and readiness of existing processes to adapt to changes in the business environment.”

Five-step approach to improve profitability

According to the study, banks should focus on these five overarching themes within their organizations:

  • Reshape – the banking industry will coalesce around four primary business models: local boutiques, global boutiques, regional champions and universal superbanks. Banks must determine their preferred business model and restructure operations accordingly.
  • Control – banks need to strengthen their three-lines-of-defense model for risk management by establishing firm-wide risk and control tools and processes, strengthening focus on vendor management and creating simpler supply chains.
  • Protect – banks need to minimize internal and external threats by addressing convoluted legacy IT architecture and demonstrating the systems in place to prevent money laundering and financial crime. They also need to embed cybersecurity in their digital and FinTech agenda.
  • Optimize – despite cost-cutting initiatives, the operating cost-to-asset ratio for banks has barely improved in the past five years. They need to drive further efficiencies by leveraging application program interfaces and open source and advanced technologies to optimize delivery and streamline processes.
  • Grow – to retain profitable growth, banks need to invest in staff and customer-facing technology to enhance offerings and experiences for targeted clients. This entails defending market share from new competitors with the use of big data and analytics to improve understanding of client expectations and develop targeted offerings to meet those requirements.

Liew Nam Soon, EY Asean Managing Partner, Financial Services adds: “The key to success is to build a better ecosystem, not necessarily a bigger bank. Institutions need to continue to seek new and innovative ways to drive profitability while proactively managing external and systemic risks. This will include better leveraging and cultivating the talent resources in their organizations to identify ways to optimize and automate existing customer channels for a seamless service delivery and better experience.”

“New technologies are transforming business models and causing disruptions across the financial services value chain. Incumbents would need to move beyond conservative, incremental adjustments toward effectively implementing and executing bolder organization-wide innovation. Uncertainty in the market cannot be an excuse for inaction,” concludes Mr. Liew.

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About the EY Global Banking Outlook 2017

For this report, 286 banking professionals across the globe were surveyed in November 2016 to provide a review of banks’ reported strategic priorities over the next 12 months. The respondents came from 29 different markets. Of the banking professionals surveyed globally, 59% were from EMEIA, 17% from the Americas and 24% from Asia-Pacific.