Deloitte's 2021 global banking and capital markets outlook: strengthening resilience, accelerating transformation

Over the past nine months, the COVID-19 pandemic has reshaped the banking industry across multiple dimensions, by ushering in a new competitive landscape, prompting a new wave of innovation, and accelerating digitization in almost every sphere of banking and capital markets. Deloitte's 2021 banking and capital markets outlook: Strengthening resilience, accelerating transformation explores the lessons learned from the pandemic, and offers industry insights based on the results of a global survey of 200 senior banking and capital markets executives on topics including digital customer engagement, talent, operations, technology, finance, risk, cyber risk, sustainable finance and M&A. It also highlights what banks should focus on in 2021 and beyond across various business functions.

Calvin Zeng, Deloitte China financial services industry Audit & Assurance partner says, "According to our forecasts, global banks are expected to provision for USD318 billion in net loan losses between 2020 and 2022. Unemployment is expected to climb much higher than it was during the global financial crisis (GFC) of 2008-2010 as the pandemic continues. Meanwhile, yields are anticipated to remain below historical levels. The pandemic is set to pose unprecedented challenge to banks’ asset quality and profitability. Banks in North America and Europe won’t recover to 2019 levels anytime soon, with APAC banks only getting near 2019's pre-COVID return on equity of 9.2% by 2022."

On 18 January, the National Bureau of Statistics announced China's GDP had exceeded RMB100 trillion for the first time, with 2.3% year-on-year growth in 2020. Globally, China was the only major economy to expand last year. From the published results of A-share listed banks, all of them showed positive profit growth at the end of 2020. Two recorded double-digit growth in annual revenue. This means that forecast revenue growth happened sooner than expected. It also shows the positive development of the national economy and effective risk management in the banking sector during the pandemic, powered by technologies and improvements in quality and efficiency.

One of the most notable effects of the pandemic is the scale and acceleration of several megatrends, including digitization, the virtual workforce, a focus on safety and surveillance, corporate responsibility, the emergence of pop-up ecosystems and an emphasis on cost reduction.

Jason Guo, Deloitte China Banking & Capital Markets sector leader says, "The net impact of these megatrends, combined with macroeconomic realities such as the low interest rate environment in the decade ahead, should fundamentally reconfigure the banking industry. First and foremost, traditional revenue sources and business growth in established segments will likely be moderate at best, which will force banks to find new paths to profitable growth. Second, scale, more than ever, could become critical as profitability pressure will put costs into greater focus. And third, advanced technology is expected to be at the heart of everything banks do."

The pandemic has accelerated the progress of technology empowerment and digital transformation in China's banking sector, and boosted the trend of online retail banking. Empowered by technologies, banks can develop a more precise profiling of micro and small enterprise customers. Online microfinancing and banking products for small businesses have become very popular, with customers able to confirm credit lines in a few minutes. Leveraging a fully digital process, business network transformation and mobile service terminals, banks can provide more convenient lending services to customers.

Although uncertainty remains, bank leaders should not hesitate from reimagining the future and making bold plays. They should institutionalize the lessons learned from the pandemic and build a new playbook by strengthening resilience now and accelerating their transformation in the post-COVID-19 world. This can include operating with agility, flattening hierarchies, speeding up decision-making, empowering employees and introducing flexible workplaces and workforces.

"Touchless services in the banking sector emerged during the pandemic, some of which have shown sustainable results in major provinces of China. In terms of transaction volume, the online-to-offline ratio (online channels include mobile banking, online banking and online payment) is 1.5 times higher than it was before the pandemic and has been increasing since pandemic controls became the new normal," says Jason Guo. "The pandemic is having a long-term effect on technology empowerment and sales transformation in the banking industry. Acceleration of online business development is set to substantially change the industry landscape, and we look forward to it."

According to the survey, 79% of respondents agree that COVID-19 has uncovered shortcomings in their institutions' digital capabilities. Some 95% of respondents said their institutions are already implementing or planning to accelerate digital transformation of services to maintain operational resilience over the next 6-12 months.

"COVID-19 has not only accelerated digital adoption, it has also been a litmus test for banks' digital infrastructures. Institutions that made strategic investments in technology will come out stronger, but laggards might still be able to leap ahead if they take swift action to accelerate tech modernization. In many institutions, digital inertia has faded: there is now more appetite for technology-driven transformation, especially in core systems," says You Zhong Bin, Deloitte Consulting Data Science Center of Excellence leader.

In front-end business, banks can elevate customer engagement by deploying an optimal mix of digital and human interaction, intelligent use of data, novel partnerships, and compelling service delivery models to fully realize the digital promise. However, evidence suggests increased digital engagement does not necessarily translate into more satisfaction. Keeping customers satisfied, retaining them for the long haul, and gaining a greater share of wallet can still be as daunting as ever.

"It is crucial for banks to retain first-time users of digital channels by using targeted offers and engagement strategies. At the same time, banks should continue to invest in digital, customer-facing technology to provide a seamless experience. To achieve this goal, banks can integrate their disparate data architectures across lines of business and functions and combine these with AI-driven analysis to create a genuinely meaningful, 360-degree view of customers," suggests You Zhong Bin.

"At the same time, it is now an opportunity for banks to continue their investment in client-facing digital capabilities: regulators are tightening oversight of financial services provided by non-financial institutions, such as third-party payment, to ensure banks and other financial institutions can compete under the same set of rules in the same business area. If banks can grasp this opportunity and provide seamless digital experiences, in addition to their existing advantages in capital and credibility, they will be able to take the lead in competition."

Employee productivity, meanwhile, is key to maintaining resilience. As banks adapt to the economic realities of 2021, they will need to make some hard decisions on talent models. The efforts and results of the Chinese government and society in pandemic control and the resumption of work and production have put China ahead of the rest of the world. Chinese banks now have an opportunity to demonstrate their own global leadership.

Banks and financial institutions in China have been addressing the need for corporate financing in pandemic control and the resumption of work and production by increasing credit support to businesses. The China Banking and Insurance Regulatory Commission has taken the lead to coordinate and provide guidance to institutions to adjust repayment mechanisms. It is also considering how banks' loans to certain key sectors, such as manufacturing and micro-sized enterprises, for the purpose of resumption of work and production, can be included or weighted in employee performance reviews to engage more support from front-line staff.  

However, the rising turnover rate and lack of workforce optimization remain critical challenges facing the banking sector in China today. Institutions have to reshape their business models and processes systematically, including cultivating digital mindsets within their organizations. They must also move beyond current concerns about wellbeing and productivity to enhance learning, team building and leadership. Using the right technology and tools will be critical to the success of these programs. Although banks will need to enhance the resilience of capital, technology and talent as they confront potential new short-term challenges, in the longer term they should accelerate and amplify their enterprise-wide transformation efforts.

Deloitte's report emphasizes that banks, given their unique and vital role in the global economy, should be at the forefront of leading social change and building a robust sustainable finance agenda by reallocating capital, enhancing risk frameworks, providing greater transparency, and improving data and reporting standards. In financial inclusion, for example, sustainable finance is not just about doing the right thing – it can be good business.

In China, the accelerating recovery of people's daily lives and economic activities has been supported by effective pandemic control measures. Loan prime rate reform and profit transfers of RMB1.5 trillion from the financial sector to the real economy have been implemented, and the deposit reserve ratio was lowered three times in 2020 to maintain reasonable liquidity. Authorities also implemented special refinancing and rediscounting policies to increase support through monetary loans, and "touchless" innovative financial services have grown to ensure access to financing. Since the COVID-19 outbreak, China's banking sector has been rolling out various initiatives to support pandemic control and economic recovery. With its unique industry advantages, banks in China are committed to sustainable financial growth and to making contributions to ensure the "six priorities" and stability in six areas for steady economic momentum.

China now has the world's largest green credit balance and the second highest volume of green bonds. In response to the government's call for corporate responsibility, the banking sector in China will support new initiatives in sustainability and continuous improvement of the environment using the power of the financial sector.

Jason Guo concludes, "Looking forward, China's banking sector will continue strengthening its effective defenses against financial crisis, such as the disposal of high risk financial assets and customers, impose strict control over the scale of shadow banking, continue to tighten the risk appetite measures of asset management products and minimize inter-bank multilevel nesting. At the same time, to fully support China's aspirations in poverty alleviation, the banking industry will leverage its advantages in capital, technologies and channels to help rural revitalization and sustainable development in China."