Cost transformation - Part 1: More than ever an imperative for Swiss banking - Banking blog

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COVID-19 is still dominating the news and focusing the minds of executives: dealing with the impact of the pandemic requires strong leadership and rigorous action.

And the impact is significant. Growth projections from the OECD Interim Economic Outlook were reduced substantially between November and March –and prospects for the rest of 2020 are weak1. The full extent of corrections to the financial markets remains to be seen.

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Graph 1: MSCI World (indexed) 6 June 2016 to 5 June 2020

Banks face rising credit default levels, lower levels of commission-based activities mid-term (once volatility settles), and falling volumes of client assets; and the balance sheets of some banks may come under intense stress. However, the current situation only exacerbates a growing problem that Swiss banks have been facing for a number of years.

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Graph 2: GDP forecasts (World and OECD ) as of 10 June 2020

Source: OECD economic outlook 2020, volume 1

The Swiss banking industry is in transformation as pressure mounts on performance, with challenges from non-banks and from ecosystems that are by-passing banks’ legacy systems with new technology.

The ability of banks to make their business models more efficient has been constrained by limited top-line opportunities, and they need to undertake forward-looking save-to-transform initiatives.

New competition and regulation have eroded bank margins

Low or even negative interest rates continue to exert intense pressure on margins, and barriers to growth are even greater for Swiss banks than for other banks globally. The profitability of Swiss banks has fallen by nearly 17% since 2013, driven largely by the changing regulatory environment.

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Graph 3: Profitability of banks vs. Market volumes (indexed)

In addition, competition is intensifying from Neobanks and FinTechs, which continue to operate on the fringes of traditional banking, and which pose a constant threat of disruption. Client value is shifting toward intangible characteristics (e.g. transparency, integrity and brand) and digital technologies that provide automated intelligent advice. Traditional value drivers in banking (e.g. proven fee models and established margin logic) are losing their attraction, increasing the pressure on cost-income ratios and diluting profitability even further.

The number of Swiss banks plunged from 297 in 2012 to 248 in 2018, mostly because foreign-owned banks and branches of foreign banks closed their Swiss business in a quest for greater focus, but some Swiss banks also exited the market. The remaining incumbents, including private banks, struggle to adjust their business and operating models to the conditions set by new competitors2.

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Graph 4: Number of banks in Switzerland

Cost management is an even stronger imperative for banks

In summer 2019, as part of its global cost survey, Deloitte collected banking information from over 250 financial services executives from around the world3. In the banking sector, 72% of the surveyed companies were planning to undertake cost reduction initiatives over the next 24 months, a slightly higher figure than the global cross-industry average.

Banks in the US were the most likely to take cost reduction measures (84%) followed by Europe (77%) and APAC (65%). 71% of respondents reported cost reduction targets of 10% or more. However, the overall failure rate for cost reduction programs in banking is 80%, on a par with the global average across all industries (81%), but European banks have the highest failure rate (87%).

The top-rated drivers of cost reduction for European banks are investments in growth areas (77%), intensified competition among their peer group (74%) and international expansion (68%). Banks expect to continue implementing strategic and tactical cost actions in almost equal measure. In Europe, the top-rated action on costs is streamlining organizational structures (64%)4.

Save-to-transform cost management strategies at the centre of the industry overhaul

In the recent past, most banks were firmly grounded in save-to-grow mode – where cost savings were used to fund growth initiatives, and strategic investments supported a differentiated business strategy. In contrast to the financial crisis of 2008/09, we expect COVID-19 to push non-financial services industries into economic downturn, rather than banking.

However, banks with a strong loan book and asset base are now moving into a save-to-transform mode. This expands on the save-to-grow mind-set to include a strong focus on digital enablement and technologies, to transform their business and help it capitalize on the many emerging opportunities that COVID-19 will further increase5.

The save-to-transform playbook includes investment in digital technologies and innovations, to improve every aspect of the business. In addition to fuelling both cost savings and revenue growth, improvements can make the business more resilient and resistant to digital disruption and economic downturns, and providing a stronger foundation for defence-oriented cost management.

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Graph 5: Key insights of Deloitte’s cost survey

With continuing pressures from the economic situation and regulation, banking business models and cost structures require a fundamental overhaul if banks are to stay relevant in the financial markets. They need to prepare for a higher level of banking efficiency.

COVID-19 is currently challenging society and economies around the world, and this makes it imperative to accelerate this banking transformation. Therefore, our next blog on cost transformation in the banking industry will:

  • Discuss a comprehensive framework of levers to embark on the cost transformation journey
  • Review how Swiss banks cope with challenges in the industry today
  • Explain which cost levers can generate a more sustainable impetus to prepare for the future of technology-dominated banking.

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1 Economic Outlook Database

2 August 2019. 2019. Monitor Schweiz (Credit Suisse). June 2019, SNB, KOF, Deloitte

3 Deloitte Global Cost Survey

4 Deloitte. 2019. The Deloitte CFO Survey – 2nd half-year 2019

5 Deloitte Banking Blog: COVID-19 boosts digitalisation of retail banking (https://www2.deloitte.com/ch/en/pages/financial-services/articles/corona-krise-digitalisierungsschub-im-retailbanking.html)

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Patrik Spiller - Partner, Monitor Deloitte Strategy Consulting and Wealth Management Industry Lead

Patrik leads Strategy and Analytics in Switzerland as well as the Wealth Management Industry Practice in North South Europe. He has 20 years of experience in banking industry consulting. He supported many leading international banking institutions and wealth managers in the development of innovation and transformational strategies, technology and operational strategies as well as shaping cost reduction programmes.

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Dieter  Klein

Dieter  Klein - Director, Consulting in North West Europe

Dieter joined Monitor Deloitte’s banking strategy practice in 2016 in Zurich. Dieter has delivered a wide range of market strategy, product development, operational and regulatory projects in the banking industry across Europe for more than 20 years. He has delivered post-merger-integration, target operating model design, implementation of regulations, outsourcing, offshoring and cost reduction initiatives. He has an in-depth understanding of the Retail and Private Banking business with extensive practical background in product management, treasury and credit risk management.

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