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Deloitte's 2022 global banking and capital markets outlook: banks are at a make-or-break moment, the window for decisive action is closing soon

While there are challenges for profitability, talent, customer and risk management, now is the time for global banks to go all-in on ESG for more opportunities

Published: 25 January 2022

The pandemic over the last couple of years has caused continuous disruption to society, and it has been relentlessly testing the resilience of banks in ways previously unforeseen. Banks today have a new found confidence of the way they have addressed pandemic-related challenges, according to Deloitte's 2022 banking and capital markets outlook. But how can they channel this new energy to scale greater heights? This annual report provides outlook and insights into the trends, opportunities and challenges that could have a significant impact on the marketplace and the banking industry in 2022.

According to the report analysis, recovery in the global banking industry is expected to be uneven across regions. In H1 2021, banks in Asia Pacific and Europe continued to add to their loan loss reserves. The top 100 Asian banks increased provisions by US$125 billion while provisions for the top 100 European banks increased by US$25 billion. In contrast, the top 100 US banks in the same period have released US$24 billion in loan loss reserves and their counterparts in Canada were doing the same.

"The brighter outlook for loan loss provisions is helping drive profitability for US and Canadian banks, but sluggish loan growth and modest interest income are likely to dampen growth in both countries," says Val Srinivas, banking and capital markets research leader at the Deloitte Center for Financial Services. "Because of overexposure to the sectors hardest hit by the pandemic, most European banks have yet to recover to pre-pandemic profitability levels. In Asia Pacific, continued strengthening of Chinese banks are a bright spot in Asia, and banks in Singapore and Australia also remain relatively sound. Otherwise, the region is beset with a k-shaped recovery since many Southeast Asian banks are dealing with asset quality concerns."

While uncertainty about the pandemic continues, overall financial prospects are generally positive for the global banking industry in 2022. "Despite a possible uptick in interest rates in 2022, low rates in the short term should keep interest income/net interest margins suppressed. However, the rebound in non-interest income from higher trading revenues and growth in fee-based business could be more pronounced and lead to overall top-line growth. Now, more than ever, banks should be bold and aggressive in orchestrating change at the pace and scale that will drive results," Val adds.

Jason Guo, Deloitte China banking and capital markets sector leader (Chinese Mainland) also emphasizes, "At this make-or-break moment, it is critical for banks, big and small, to take account of the tectonic shifts reconfiguring the global financial systems. For instance, the pandemic-related challenges have added pressure on the industry to develop and embrace a more modernized workforce. The bank of the future will require new skill sets for higher-order work, ranging from purely technical to essential human skills, such as empathy, judgment and creativity."

Deloitte's report pointed out that, bank executives today are under extensive pressure to develop an agile and modern workforce. Employee experience and augmenting digital skills should become priorities. Many banks are using alternative talent models to augment their workforce and they are expecting to hire more gig-based employees and contractors to provide specialized capabilities in areas such as cybersecurity, cloud, climate science and risk modelling. At the same time, banking executives should embrace a unique blend of leadership traits. Not only do they need to be more adaptable than ever, but they should also be unapologetically bold while making empathy the foundation of their reinvigorated culture.

"Digitization is rapidly changing customer expectations and behaviour. Marketing financial services today goes beyond just understanding and meeting the needs of a customer, customers today also expect institutions to give them access and control of their own data," says James Polson, Deloitte China banking and capital markets sector leader (Hong Kong). "While there is room for improvement for banks before customers feel in control of their data, open banking projects around the world will be the catalyst to push banks to give customers control over who can access their data in exchange for something of value in return, such as better pricing, higher rates or greater rewards."

The rise of digitization also leads to enormous pressure on banks to contend with the expansion in volume, velocity and variability of cyber threats, and respond to new demands from within the business as well as heightened regulatory expectations. Cyber incidents, fraud and money laundering are increasingly becoming intertwined as sophisticated criminals exploit vulnerabilities in technology. For example, criminals like identity thieves are often part of sophisticated global crime syndicates using advanced technologies such as AI for spoofing. The increasing intersection between cyber risk and financial crime has prompted banks to adopt a collaborative approach and take steps to improve their processes for overseeing cyber and financial crime internally.

2022 is a critical year for large banks to establish tangible criteria to achieve their emission-reduction goals. They are also expected to solidify their stress testing and credit risk modelling procedures; amplify efforts to help clients manage physical and transition risks; and enhance their disclosures on climate-related risks and opportunities. The explosive demand for green products and investments globally across all sectors of the economy creates ample opportunities for banks, from lending to carbon trading. Besides continuing to innovate on climate finance through products, global banks should work together to help transition companies, industries, and countries to a net-zero world.

"As 2022 begins, ESG is gaining unprecedented attention and value, which provides a great opportunity for the bank executives to lead the creation of an authentic, differentiated identity that embeds higher purpose. After the initial hit by the pandemic, the global banking industry has already gone through the recovery and resilience stages, and then established a new concept of growth. It will inevitably mean the banking industry continues to grow stronger," Jason concludes.

For more findings from Deloitte's 2022 banking and capital markets outlook, please click here to visit.

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