It seems like every 10 years there is a singular, transformative event that dramatically shifts how the entire world works and lives. In 2020 we learnt exactly what that moment is for the coming decade. The COVID-19 pandemic was both completely predictable and totally unexpected; there had been many years of warnings that such an event was possible, but the timing and scale came as a shock. As the virus crept around the world, shutting down economies in its wake, many could only watch and wait until the unstoppable tide reached them.
Today, however, things are starting to look different. Vaccine rollouts are well under way and there is light at the end of the tunnel. While there are certainly months, if not years, of management and mitigation to go, a predictable outcome is emerging that necessitates future planning, particularly in the financial sector. However, the world’s banks have a lot of challenges to contend with. Recognising the extreme financial toll that was put on people and businesses, governments across the globe deployed a multitude of financial stimulus policies to keep economies ticking over.
In many ways, the situation is somewhat similar to what was seen a decade ago during the Global Financial Crisis. While the GFC was self-inflicted by the financial sector, with long-term fixes being largely focused on regulatory changes, the industry-wide scale of the threat is comparable. Although, this financial stimulus cannot go on forever, which poses significant challenges that only the best banks will be able to successfully navigate.
Close a window, open a door
While there are plenty of reasons to be optimistic about the future, it is not without difficulties. A major one is potential credit losses combined with a muted economic recovery. According to McKinsey’s 2020 Global Banking Annual Review, depending on the recovery rate, between $1.5trn and $4.7trn in banking revenue could be lost between 2020 and 2024. This suggests that global banking’s return on investments will not return to pre-crisis levels for at least five years. This poses significant challenges in the medium term.
Another factor is how long the stimulus being provided by governments can continue. Writing for AMP Capital’s 2021 global banks outlook, Andrea Jaehne explained that stimulus packages and regulatory flexibility have played an instrumental role in keeping banks afloat, but at a cost: “However, we believe the unnecessary extension of looser regulation or even a final removal of the improved standards since the GFC could fuel risks that may eventuate over the next years and could lead to negative rating actions, although we expect banks’ management teams to be mindful of the rating implications,” Jaehne wrote. “We believe that current strong capital levels of the largest European and North American banks could weaken once we see actual credit losses start to materialise.”
Calvin Zeng, Deloitte China financial services industry Audit & Assurance partner issued a similar forecast. “According to our forecasts, global banks are expected to provision for $318bn in net loan losses between 2020 and 2022. Unemployment is expected to climb much higher than during the global financial crisis of 2008–2010 as the pandemic continues,” Zend said at the release of Deloitte’s 2021 banking and capital markets outlook: Strengthening resilience, accelerating transformation report. “Meanwhile, yields are anticipated to remain below historical levels. The pandemic is set to pose an unprecedented challenge to banks’ asset quality and profitability. Banks in North America and Europe won’t recover to 2019 levels anytime soon, with APAC banks only getting near 2019’s pre-COVID return on equity of 9.2 percent by 2022.” While banks should be able to rebuild their lost capital, the situation will be challenging in the years ahead .
Exposing the cracks
With in-person business rendered impossible for many throughout the pandemic, people turned to digital systems to get jobs done. While digital transformation has been a work-in-progress at banks for many years now, the pandemic provided an imperative to speed it up. It quickly became apparent which businesses had been successful in their transformations, and which had not. According to Deloitte’s 2021 survey of senior banking and capital markets executives, 79 percent of respondents agreed that the pandemic uncovered shortcomings in their digital capabilities. Additionally, 95 percent of respondents said their institutions are already implementing or planning to accelerate a digital transformation of their services to maintain operational resilience.
You Zhong Bin, Deloitte Consulting Data Science Center of Excellence leader, said the pandemic has been something of a litmus test. “Institutions that made strategic investments in technology will come out stronger, but laggards might still be able to leap ahead if they take swift action to accelerate tech modernisation. In many institutions, digital inertia has faded: there is now more appetite for technology-driven transformation, especially in core systems.”
Still, the value of front-end digital systems remains high, particularly as regulators continue to look at the expansion of financial services provided by non-financial institutions. “If banks can grasp this opportunity and provide seamless digital experiences, in addition to their existing advantages in capital and credibility, they will be able to take the lead in competition,” You Zhong Bin said. Ultimately, it will be up to each individual bank to decide where their digital evolution needs to be prioritised.
Preparedness for the future is a concern for all banks, but the winners in this year’s World Finance Banking Awards are particularly notable in their regions. All of the winners have demonstrated years of best practice, and are in an ideal situation to meet the coming challenges head on. Congratulations to the winners.
World Finance Banking Awards 2021
Best Banking Groups
Dominican RepublicBanco Popular Dominicano
GhanaZenith Bank Ghana
IsraelIsrael Discount Bank
JordanJordan Islamic Bank
NigeriaGuaranty Trust Bank
Saudi ArabiaRiyad Bank
Best Investment Banks
Colombia BTG Pactual
NigeriaCoronation Merchant Bank
Best Private Banks
AustriaErste Private Banking
BelgiumKBC Private Banking
CanadaBMO Private Wealth
Czech RepublicCSOB Private Banking
FranceBNP Paribas Banque Privée
ItalyBNL BNP Paribas
Liechtenstein (Best multi-Client Family Office)Kaiser Partner
SwedenCarnegie Private Banking
TurkeyTEB Private Banking
USBank of America Private Bank
Best Commercial Banks
AustriaRaiffeisen Bank International
CanadaBMO Bank of Montreal
Czech RepublicCeska Sporitelna
MacauBank of China
Sri LankaSampath Bank
Turkey (Most Sustainable Bank)Industrial Development Bank of Turkey
United StatesBank of the West
VietnamSai Gon J.S. Commercial Bank
Best Retail Banks
MacauBank of China
NigeriaGuaranty Trust Bank
SpainBanco Bilbao Vizcaya Argentaria
Sri LankaSampath Bank
Most Innovative Banks
AfricaGuaranty Trust Bank
Asia Hong Leong Bank
Europe QNB Finansbank
Latin America Banco Popular Dominicano
Greece Most Innovative Savings BankEurobank
Macau Best Cash Management ServicesBank of China
Nigeria (Most Sustainable Bank)Access Bank
Thailand (Most Sustainable Bank)Krungthai Bank
Banker of the Year
AfricaSegun Agbaje, Guaranty Trust Bank
Latin AmericaRoberto Sallouti, BTG Pactual