Banking challenges IE MBA Ardyan Gumanti
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Transcript of Banking challenges IE MBA Ardyan Gumanti
Greatest Challenges Facing Banking Industry and How I can Contribute to Solve Them
Presentation to Answer IE MBA Topic Question HJakarta, March 2017
By Ardyan H. Gumanti
After years of turmoil, global banking has settled into a new trends, characterized by stable re-turns and strong profits, but slow growth especially by US & Developed Countries’ Banks.
Asia-Pacific became one of the largest sources of global banking profits and will likely continue to deliver the bulk of in-dustry expansion in coming years. From the graph, It is seen that the share of global after-tax profits in banking generated by Asia Pacific increased significantly from 28% to 46% in 10 years.
Average ROE Revenue Growth
14.00%
16.80%
7.30%
3.90%
9.30%
4.30%
Pre Crisis (2002-2007) Crisis (2008-2011)
Even though profit continues to increase, average ROE is stagnating and revenue grows slowly. It can be seen that from 2011 to 2015, the average ROE and revenue growth only grow 27% and 10% consecutively.
Sources : Mckinsey & Co.
However, the growth unfortunately will not be continuous since Asian banks that became the source of growth for the past 5 years are beginning to slow down
Revenue growth are predicted to decline since the margins that are derived from the transaction are falling. With margins falling, Asia-Pacific is beginning to resemble the rest of the global industry. Af-ter rapid expansion and adversity following the 2008 economic crisis, the global sector appears to be settling into a new reality characterized by modest growth and steady ROE.
Sources : Mckinsey & Co.
The falling margin are caused by 4 main challenges; slowing economies, new attacker, weakening balance sheets, and new regulations.
The economic slowdown rolling across the world especially in Asia will affect banks and their customer. It is also expected that banking profit growth to slow from 10% p.a be-tween 2011 and 2014 to 3% p.a between 2016 and 2021.
FinTechs—start-up tech companies offer finan-cial products such as payment and lending platforms as well as established companies from other industries i.e. online marketplace are invading banking business
An increasing volume of non-performing loans is putting stress on banks as interest-coverage ra-tios are declining at large companies throughout the world thus making banks has to raise more capital to maintain CAR
Implementation of Basel III will has a huge impact on banking since its im-plementation is expected to decrease banks’ ROE by 13-14 percent-age points
EconomicSlowdown
NewAttackers
WeakeningBalance Sheets New
Regulations
Margin
Slowing economics especially from China has sent shockwave throughout banking industry.
2008Global
Eco-nomic Crisis
2008 - 2015• The slowdown
has been led by China, which hit inflection point in 2015, when foreign ex-change reserves fell 13 percent
• Economic growth had al-ready slowed a few years ear-lier, but hit a 25-year low of 6.9 percent in 2015. The macroeconomic brake was fol-lowed by weak-ening In-vestment and exports, while employment and wage growth rates also dropped
Economic Growth6.9%
44.8%3.8 to 3.3 Trillion USD
Investment
FX Reserve
For China, 2015 was an inflection point toward a different phase of eco-nomic growth
ForwardLooking
2016 - 2021
At the same time, net interest margin is expected to drop a further 4 percent annually between 2016 and 2021 after falling by 6 % a year from 2011 to 2016.
The 2008 global economic crisis sent shockwaves throughout many industries and had a particularly profound impact on banking. The eight years since have been characterized by slower revenue growth
Competition between banks as well as Financial Technology (FinTech) firms has made banks lower their margin
The rise of FinTechs has pressured banking profit pools and taken away customers. Retail services are a particular target,
FinTechs and established technology companies alike are benefitting from financial customers that are becoming more comfortable banking through digital channels.
Overall, the impact on banks in the world could be massive. Even Accenture predict that 44% of banks will be affected by Fintech.
Fintech Financing Activities
8%
20%
8%
4%4
%
56%
Bank Loose Market Share
Bank are disaggregated
Financial Services De-livered at lower margin
Core banking services are addend to non -fs offerings
Challengers acquired by incumbents
All player position themselves to add value
This is due to the fact there are a lot of banks that have not prepare for upcoming digital innovations
Banking Future
How equipped banks to face innovations?Fintech Development in Asia
Bank balance sheets are coming under increasing stress as a result of weakening loan portfo-lios
2009.5 2010.5 2011.5 2012.5 2013.5 2014.53
4
5
6
7
8
9
10
11
8.3
6.75.9 6.2
6.8 6.57.5
5.7
4.5 4.45.1
4.6
9
8 8
9.4 9.610
Developed Asia PacificEmerging Asia PacificAsia Pasific (combined)
Increasing in Stressed Assets (USD Bio)
Decreasing in Top 250 Companies’ Interest Coverage Ratio (%)
USD 600 Bn
Additional Capital Needed
Due to economic slowdown, a lot of companies especially from emerging country have seen their interest coverage decreased. Even though the Coverage Ratio from developed country’s companies is increasing, it can not offset the decrease of performance from emerging countries’ companies
The worse performance of the companies made the facilities given by banks to those companies categorized as Stressed Assets. The increasing stressed assets made the banks has to increase their capital as reserve for stressed assets
However, with bank’s recent weakness, banks are much less attractive for investors. since, theydid not reward in-vestors very well com-pare to other sectors
The implementation of new regulation has made ROE decline in considerable percentage. This decline is driven by new requirement to more than double Tier 1 capital in today’s capital mar-kets businesses.
• Existing minimum regulatory capital lev-els of bank were insufficient in relation to the exposures and losses that banks has suffered during crisis
• Capital adequacy at Basel I & II did not capture risk posed by bank exposures to transaction
• Basel I & II only focused on capital with no standard in liquidity
Background Key Elements Basel III Implementation
Capital Ratio
8%
Leverage Ratio
30:1
33:1>13%
LCR
>30 daysStressed
Periods
NSFR
>1 yearStressed
Periods
EffectsImplications
Reduced industry profitability (ROE)
Banks need to raise more capital to fulfill new common equity requirement
Greater competition/increased costs for retail deposits
Cost of funding will likely increase for all institutions
Stronger and more stable
balance sheets of
banks
Reducing Banks’ earning power during
good time
Safer and better able to survive during hard time
Banks will run several initiatives to face those challenges…
Certain promising segments remain untouched by most Financial institutions. Tapping Into these growth pockets – the unbanked and underbanked – can help banks rekindle bank momentum.
Growth Pocket Digitalization Strengthened Non Interest Income
Digital transformation will be crucial for Asia-Pacific banks to secure their profitability and revive their growth momentum since digital bank is cheaper to build and operate.
Optimizing &Efficiency
Unbanked People (%)USD Mio
Cost of Traditional vs Digital
Due to the declining of interest income caused by competition and also increasing stressed asset due to economic slow-down, banks need to find new source of income through transaction fees. Income growth of this new source will offset the decline of NII and making banks’ revenue grow fur-ther
Interest Income vs Fee
For at least the last seven years, banks have focused even more on their cost-to-income ratios as they seek a return to reliable and sustainable profitability. In fact, since the 2008 crisis, it's estimated that global banks have succeeded in taking out billions of dol-lars in costs
Bank Efficiency Ratios
I want to take part as a Consultant focusing on financial Institutions in Indonesia to help Indonesian banks meet these challenges
Room to grow for Indone-sian banking since the market is still under-served
Got the exposure of vari-ous kind of banks and problems faced
Working with C-level execu-tives will shape how I see problem as a CEO. Those view will benefit me to real-ize my LT goal to es-tablish P2P Lending Platform
Why
As a Consultant focusing of Financial Institutions in Indonesia, I want to advise banks’ management to face challenges ahead by working together to implement several initia-tives
Establish efficient business By enable decision making capabilities that im-
prove company’s effectiveness
Develop strategies so that banks can adjust business models, refocus long-term strategy, assess business portfolios, & explore new
markets and partnerships.
Help banks adapt distribution and service channels as well as reduce back-office costs and optimize service operations
through technology
Improve banking customer strategy by redesigning
bank’s products ,increasing sales effectiveness and devel-oping unparalleled cus-tomer loyalty programs that boosts bank’s profit.
With my experience as a Corporate Banker, I have already possess some qualities to become a good consultant
Banking Knowl-edge
Leadership Skill
Relationship Skill
International Experi-ence
My experience in both working and leading teams of 5 people cross functions to achieve common goals has enabled me to develop my leadership skill
My experience as Relationship Manager has trained me to meet new people and make good relationship with them
My experience as Banker for 5 years has made me have a deep understanding about how banks work
I have an experience in working with 2 multinational teams for syndicated loan deals. That experience has broaden my network and also my view about culture around the world
Business Knowl-edgeMy experience as Banker
has made me able to understand how business work in Indonesia& SE Asia
IE can help me to become well rounded consultant in Financial Institutions through the school’s breakthrough curriculum and supportive environment
Mastering Business Fundamen-
tals
EnhanceSoft Skills
EntrepreneurialMindset
MultinationalEnvironment
Given my engineering background, IE focus in teaching business fundamentals will
benefit me
IE Professional Fitness Program will prepare
me to face the competitiveness of
business world
Given my LT Goal is to establish P2P Lending Platform, I need to enhance my entrepreneurial mindset
through the program
The environment will broaden my net-work and expertise that I can leverage to reach my future
goals
THANK YOUGRACIAS