1. WHAT NEXT FOR GLOBAL BANKING? THE CHALLENGE OF COMPLEXITY
MAY 21, 2015
Alan McIntyre
Partner

2. Global banking returns have stalled at utility levels
Average ROE of Bank vs. non-Bank sectors in S&P Global 1200 20 18 16
Average ROE (%) 14 12 10 8 6 4 2
Banks
Other industries

3. Canadians banks have clearly outperformed US banks over the last decade
Canadian versus US Bank ROEs
This product proliferation leads to complexity in management with the following all affected:
Systems
Sales and branch staff training
Customer communication
Marketing
Risk and control
Etc.
Recent conduct requirements have increased the cost and complexity of the sales processes leading to additional control layers for the process
Markets are increasingly interconnected and global with more and more revenues booked to Financial Institutions by clients outside of the home market of the bank
The client base is also increasingly international requiring institutions to service their accounts from across the world
This forces institutions to either have operations across the globe or have links with local players that can act for them
Regulations change from jurisdiction to jurisdiction
Systems integration across borders/time zones/other institutions required
US Top 50 Bank ROE
Canadian Top 6 Bank ROE

4. Bigger is not now better in banking
Change in ROEs of 24 GSIBs
Change in ROE of rest of top 1000 banks
~1%
(2006)
decline
Performance decreasePerformance decrease
Higher capital chargesHigher capital chargesHigher capital charges
ROE (2014Q2)3
(2006)
decline
Performance decreasePerformance decrease
Higher capital chargesHigher capital chargesHigher capital charges
ROE (2014Q2)3

5. Productivity in US financial services has stalled
US multifactor productivity index by sector, 1987–2012 70 60
Productivity index 50
Productivity gap of FS vis-a-vis Tech. ~35% 40 30
Productivity CAGR ’01–’12 for Finance and Insurance sector = 1% 20 10
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Financial Services
Technology
Manufacturing

6. Productivity in Canadian financial services has also stalled
Canada multifactor productivity index by sector, 1987–2012
Productivity index
Manufacturing
Technology
Financial Services

7. Complexity is the major challenge facing the global banking industry

9. Complexity is the major challenge facing the global banking industry
Regulation

10. The impact of regulation on returns
Post-crisis impact of regulations on Bank ROEs
Global Wholesale Banking
US Retail Banking
-1%
-2%
-3%
-4%
-5%
-6%
-7%
-8%
Estimated RoE impact post-mitigation
Bull to Bear

11. Proliferation of channels
Sources of complexity
Regulation
Proliferation of channels

12. St. Peter’s Square on April 4, 2005

13. St. Peter’s Square on March 13, 2013

14. Sources of complexity Regulation Proliferation of channels
Fragmented infrastructure
Proliferation of products
M&A
Geographic expansion
Stagnant productivity and unattractive returns

15. Big picture business portfolio analysis
Value
Things
Geographies
Businesses
Products
Customers

16. Typical response of banks to regulatory change

17. Triaging regulation Regulator says Do X! Skills-based Modular
Is this compliance?
Is this strategy?
Skills-based
Modular
Shared services
Accurate and efficient
Impact analysis
Business choices
Only then
Systems
Organization
Efficiency

18. The illusion of customization
Toyota Camry
Toyota Highlander
Toyota Solara
Lexus ES 300
Lexus RX300

19. Platforming in banking
Customer channel
Advisor
Branch
Mobile/ internet
Phone
ATM
Integration layer
Common data layer
Product components
Configurable components
Few legacy silos
Common application
Common front end
Image and document management
Intelligent workflow
Process management
Security
Database management
Web services
Services

20. In conclusion
Increasing complexity has lowered returns in banking and caused productivity growth to stall
Key drivers are regulation, proliferation, and operational fragmentation
To simplify their business banks must:
Be ruthless in their application of the 80/20 rule
Learn to manage regulation as a core competence
Create the illusion of customization without the silos