Global banks need more revenue, not cost cutting

The latest edition of the EY report, "Global banking outlook 2015: transforming banking for the next generation", looks further ahead than usual short-term thinking, setting out what the advisory firm sees as the five "transformation imperatives" banks must embrace in the coming decade.

The next phase towards greater profitability requires increasing revenue, with EY suggesting that, if the average global bank grew its revenues by 17 per cent from FY13 levels, it would be able to deliver a 15 per cent ROE without any further cost reduction.

However, six years on from the global financial crisis, a global economic recovery is yet to be achieved. As EY points out, the average ROE of the 200 largest banks has declined from 17 per cent in 2005-07 to 9 per cent in 2011-13.

In an era of continued low economic growth, EY suggested four areas where banks will be able to generate higher revenues over the next decade:

•    targeting new customers in emerging markets;
•    developing new products and acquiring market share in developed markets;
•    funding infrastructure investment; and
•    partnering with non-banks.

Having a wide product range, once seen as key to retaining customers, is considered counterproductive in some quarters. For instance, EY observes that "there is little, in our experience correlation between the size and breadth of a bank's product set and its market share.

"Furthermore, there is little evidence that product proliferation has improved choice for customers. Instead, they have been left bewildered by an array of products with a variety of terms and conditions, few of which are suited to them individually.

Although many banks have started talking about a customer-centric (rather than product-centric) approach, few have achieved it," EY said.

"The product-centric approach has done little to benefit banks. They have had to grapple with the costs of managing and distributing all those products and increased conduct risks; the complexity and diversity of products has contributed to recent mis-selling to both business and retail customers.

"This has eroded trust in institutions while the concomitant fines have had a direct impact on bank profits - for example, US banks have been fined around US$90 billion for mortgage and asset-backed security mis-selling, while payment protection insurance and interest rate swap mis-selling has cost UK institutions an estimated US$40 billion in fines and litigation."

"We believe that for banks to be truly customer-centric and to avoid the risks of mis-selling, products must become customer driven. However, any move to a customer-driven approach will require banks to rationalise and simplify their product sets. By breaking products into their component parts, banks will enable customers to tailor products to suit their needs."