We've certainly seen plenty in the news lately about banks downsizing their operations, and sadly their staff too. In particular, last week the Bank of America made a shock announcement that 600 branches would be closed and that up to 40,000 jobs would be lost. We've also been reading about the proposed bank reforms in the UK, including increased capital adequacy and regulation, which has all certainly left me wondering where the world of banking is headed.
It's quite clear that with shrinking interest margins and increasing impairments, that profits are under pressure. While the right response is to turn to reducing operating costs, there has also been talk of M&A activity to boost profits given the depressed valuations of many banks right now. However, M&A is particularly risky when margins are so tight, because there will be increased costs in the short- to medium term not only in terms of raising capital, but also in terms of the movement of information, culture change, and of process and technology changes required post acquisition. Indeed, it is especially risky in the context that perhaps this economy IS THE NEW NORMAL, meaning that profitability will remain depressed until both the business models and operating models can be adjusted to reflect the new economic realities out there.
Impending increases in global bank regulation will also serve to increase operating costs, and with the proposed changes to capital adequacy, the availability of credit will be significantly reduced, putting further future pressure on interest income and profitability. This means that the current cycle of downsizing may yet go through a second round post the proposed bank reforms... It also begs the question of who will suffer the pain of reduced credit - big business, small business, or the individual customer. I think that small business will unfortunately bear the brunt of this, because at low margins, it will be significantly more cost-effective effective to sell fewer large loans than a considerable volume of relatively smaller loans through a much larger geographical footprint...
In concluding, I think that the global banking juggernauts are actually too big for this economy. Furthermore, I think that this is perhaps rather the time for divestiture in the banking industry, where economically viable but non core bank operations and even business activities are sold, in so doing creating many new, smaller, more sustainable economic entities out there. This will give banks more of a chance to return the focus on their real reason for their existence, being to "grease the wheels of commerce" and to facilitate CUSTOMER financial needs, not forgetting that it is CUSTOMER deposits that feeds their ability to advance credit to business!
Hmmm, that's all fair enough, IF banks weren't being bailed out with taxpayers money ... making essential restructuring less dramatic than it should be if it was a normal enterprise ...
News just in: I've been invited to present a more in-depth perspective on the future of banking to a global audience of bankers in Singapore next year!
It's quite clear that with shrinking interest margins and increasing impairments, that profits are under pressure. While the right response is to turn to reducing operating costs, there has also been talk of M&A activity to boost profits given the depressed valuations of many banks right now. However, M&A is particularly risky when margins are so tight, because there will be increased costs in the short- to medium term not only in terms of raising capital, but also in terms of the movement of information, culture change, and of process and technology changes required post acquisition. Indeed, it is especially risky in the context that perhaps this economy IS THE NEW NORMAL, meaning that profitability will remain depressed until both the business models and operating models can be adjusted to reflect the new economic realities out there.
Impending increases in global bank regulation will also serve to increase operating costs, and with the proposed changes to capital adequacy, the availability of credit will be significantly reduced, putting further future pressure on interest income and profitability. This means that the current cycle of downsizing may yet go through a second round post the proposed bank reforms... It also begs the question of who will suffer the pain of reduced credit - big business, small business, or the individual customer. I think that small business will unfortunately bear the brunt of this, because at low margins, it will be significantly more cost-effective effective to sell fewer large loans than a considerable volume of relatively smaller loans through a much larger geographical footprint...
In concluding, I think that the global banking juggernauts are actually too big for this economy. Furthermore, I think that this is perhaps rather the time for divestiture in the banking industry, where economically viable but non core bank operations and even business activities are sold, in so doing creating many new, smaller, more sustainable economic entities out there. This will give banks more of a chance to return the focus on their real reason for their existence, being to "grease the wheels of commerce" and to facilitate CUSTOMER financial needs, not forgetting that it is CUSTOMER deposits that feeds their ability to advance credit to business!
Hmmm, that's all fair enough, IF banks weren't being bailed out with taxpayers money ... making essential restructuring less dramatic than it should be if it was a normal enterprise ...
News just in: I've been invited to present a more in-depth perspective on the future of banking to a global audience of bankers in Singapore next year!
No comments:
Post a Comment