There exist as many definitions of mega trends as there are definitions of risk. In its simplest form, a mega trend is a long term change in, for example, demographics, and societies, regulation that drives other trends in financial markets and compels a redirection of sales, growth and strategy. So what does KPMG think will be the defining changes that will force the banking industry to react? Here is our list of the top five megatrends that we see and their impact on banking activities for the current and immediate future.
1. Investor base heading eastwards and the triumph of the “niche”non-core bank
Over these last 15 years, we have seen significant changes in the profile of the investor base in Maltese banks. At the turn of the century, we had several Turkish owned banks operating in Malta – today very few remain. Then we had the boom of the Austrian banks and again today most of those banks have either changed hands or they have moved out of the scene completely. As Europe continues to battle with an ailing banking system that is finding it hard to get back on its feet, the profile of the “new” investor in the Maltese banking sector, supported by the interest that KPMG is seeing, is that of a Middle Eastern or Far Eastern provenance. The banking models for non-core banks will be largely based on trade finance or the offering of specialised banking products or services.
2. The asset side of the balance sheet will be the problem for the core banks
“Credit growth has been on a downward trend since 2008 and turned negative since 2012, widening significantly in 2013 and 2014”. Banks lament that they are not seeing any decent bank financing proposals coming from the market. The market complains that banks are not willing to lend no matter what you put in front of them. Stalemate. This is a new reality for Maltese banks and the Maltese entrepreneur. As regulation bites and capital absorption is the key driving force behind every lending decision, the banks are being left with a huge problem on their hands. To compound matters, there is no sign of deposits drying up and so the big question that banks have to grapple with is what to do with the money –this in an environment where banking shareholders are showing signs of exasperation at the low return on their investment. Treasury departments are definitely set to grow and become more specialised.
3. Fees and commissions rather than Net Interest Income
The general low interest rate environment is set to prevail. This means that banks will increasingly look at other ways to generate revenue that go beyond the traditional interest spreads. They will rely more heavily on fees, commissions and charges to achieve the double digit growth and dividends that shareholders expect. Breaches will become more heavily penalised and potentially, products such as cheques that generate a lot of administrative work for banks and are labelled as “expensive” products may also become subject to a charge, in a drive to push the public to increase the use of cards. We will see a revived interest in creating products and specialised services that generate fees.
4. The continued pursuit for perfect corporate governance
In a banking environment where regulation is for the first time imposing governance arrangements in banks through the CRDIV package and a Maltese banking industry which is characterised by either small banks with an emphasis on remaining lean or local banks, where NEDs are sourced from old school tie networks or other local networks, there is bound to be weeping and gnashing of teeth over these new rules. As regulators push in their pursuit of perfect corporate governance in an imperfect local banking scene, it will be interesting to see where the dust will settle in a few years’ time. There are already those who are saying that being a bank board member will become a full-time job especially for the systemically important banks. Certainly, the way that Maltese banks look at their board and its composition and the demands being placed on board members, is slowly changing. This is likely to resulting increases in the cost of governance arrangements for banks going forward.
5. Data, data and even more data
Speak to any European banker from a systemically important bank and they will tell you that BCBS 239 is one of their top agenda priorities for the foreseeable future. Issues with data or the lack of coherent data capable of being processed at the touch of a button was one of the key findings from the AQR assessment that was carried out in systemically important Eurozone banks in 2014.Technology will need to move far higher up the agenda in Maltese banks to meet regulatory demands but also to service an increasingly demanding customer base. Interfaces with users will become simpler and more user-friendly and banks will slowly discover the importance of client profiling and effective data analytics to give them an edge on the competition. To quote Harvard economist, Ted Levitt “The future belongs to people who see possibilities before they become obvious”. Banks may complain that they already have too much on their plates but the world will keep on changing leaving today’s complainants panting to catch up.
© 2017 KPMG, a Malta civil partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.