Restoring balance sheets has been the first order of business for bank executives after the hardest financial crisis in 80 years. But some are now trying to envision what the industry will look like not too far down the road and how they will compete in a radically transformed marketplace.
Accenture recently conducted a global survey of bank executives, private-equity firms and bank analysts, including our own analysis and modeling of fundamentals at 150 banks, to better understand the changes occurring and identify strategies for high performance.
The results were eye-opening. Our research suggests that by 2012 there will be a substantial shakeout in the number of institutions and kinds of growth strategies. There will be fewer multiregional universal banks. While a handful of players will continue to succeed with simplified global universal banking models and economies of scale, many will become specialists at a global level or focus inward to shore up their regional dominance.
In the U.S. market, we expect to see mounting pressure on regional banks and substantial consolidation, particularly in the hardest-hit markets like the Midwest.
Accenture also expects to see far more foreign bank activity in the U.S. by 2012 in markets like Florida and Texas, which should see strong growth as the economy rebounds. Having been less damaged by the global recession than their American peers, many foreign institutions, like the top Canadian banks and several leading Spanish institutions, have the advantage of being comparatively well capitalized, free of the Troubled Asset Relief Program's costs and restrictions and more customer-focused in their business models.
Many foreign banks will look to launch acquisitions from their existing U.S.-based operations. The buying spree will be fueled by an unprecedented investment opportunity: low-cost deposits combined with downside loss protection from the government. This opportunity will also increasingly attract private-equity interest.
For many, the fallout from the current crisis will continue. Many institutions — especially in states like California, Florida, Michigan, Arizona and Georgia — will face survival challenges from increasing commercial loan defaults, credit card delinquencies and foreclosures.
In this Darwinian environment, how will U.S. banks rebuild from their current lows of 4%-5% return on equity toward the 15% ROE that we believe will characterize high-performing banks by 2012? Based upon our research, Accenture has identified four imperatives for rebuilding profitability and competitive advantage over the next three years.
Focus on restoring customer trust and confidence. The principal challenge confronting banks is to overcome the erosion of customer trust and bank reputation. Improving products, pricing, risk management and transparency, simplifying customer offerings and enhancing the customer experience are key.
Attack nonstrategic costs. Banks need to reduce costs by at least 20% from 2008 levels. Beyond straight work-force reductions, the priority must shift to materially improving operating model efficiency.
Most banks continue to have a lot of decentralized costs and siloed organizational functions that can be transitioned into more efficient share services function. Further, banks should focus on an immediate savings gold mine in reducing third-party spending and optimizing procurement functions — from IT to office supplies.
Embrace analytics to drive sales and service. Casting a wider net for potential customers through the online channel and employing analytic technologies across all channels to reach customers with products that suit them has become a business necessity. How many of the same credit card solicitations do the same U.S. consumers receive multiple times from the same institutions each month? Customer analytics and more efficient marketing will not only strip out this sort of waste, they'll drive breakthrough growth. Lessons can be learned from other industries (retail and telecoms, for example) that have successfully developed customer data and analytics capabilities to deliver deeper customer insight and better-targeted marketing.
Integrate risk management throughout the organization. Public-sector intervention will result in clear calls for transparency, stricter corporate governance and more stringent regulatory compliance.
To meet these challenges, risk management will need to be integrated across risk types and business units and embedded deeply within organizational culture. Sophisticated risk analytics will improve predictive management of the loan-loss ratio, while the creation of nonperforming loan "factories" will enable more efficient recovery and collections. The recent government stress tests brought to light the critical need for more sophisticated reporting capabilities and loan portfolio management tools.
The banks that most effectively execute on these imperatives by 2012 will be the industry's high performers.