Insights on the Banking and Capital Markets Outlook

December 5, 2018

A blog post by Val Srinivas, banking & capital markets research leader, Deloitte Center for Financial Services

Divergent economic performance following financial crisis

A decade after the financial crisis, the banking industry is on stronger footing. The global banking system not only has grown bigger but also is more profitable than at any time in the last 10 years. But, this growth is not uniform across regions.

US banks generally are in a more favorable position than their European counterparts. Assets at US banks exceeded $17.5 trillion,¹ and return on equity (ROE) reached a post-crisis high of 11.83 percent in the first half of 2018.² The story is similar for other measures as well. However, in Europe a unique set of challenges, such as structural deficiencies, overcapacity, and low or negative interest rates, have caused banks to become smaller, and some are still struggling with profitability. Meanwhile, in the Asia Pacific (APAC) region, the most impressive development has been the growth of Chinese banks over the last decade.

While the current state is reassuring, there are signs that challenges might lie ahead, mainly stemming from a potential deceleration in real GDP growth. In our latest economic forecast, Deloitte economists predict a 25 percent probability of a recession in the US in late 2019 or early 2020.³

Navigating macroeconomic changes in 2019

On the regulatory front, divergence among jurisdictions in terms of focus and priorities, whether related to customer privacy or investor protection, is likely to continue. The uncertainty regarding Brexit remains a factor for many global banks. Although there has been some relief given to smaller and mid-size banks in the US, larger institutions can expect to operate under a similar regulatory agenda. Meanwhile, efforts to regulate fintechs without discouraging their innovation potential remains a common theme globally. While the US Tax Cuts and Jobs Act has already had a meaningful impact on banks' financials, navigating the new tax realities likely will be no easy task. Banks will need to revisit decades-old decision criteria on where to invest and how to manage intra-company cash flows. They will need to go beyond direct effects to look at the second- and third-order implications of the new tax regime, whether they relate to human capital or research and development. A rigorous analysis of such impacts can happen only with the best modeling tools and quality data. As banks—particularly those with a global footprint—settle into the new equilibrium, there is a compelling need for a fresh way of thinking and organizing to make the most of the current tax scenario.

In the technology arena, where banks and capital markets firms are spending billions of dollars modernizing their systems, the potential benefits of emerging technologies have never been greater. However, the hodgepodge of systems, platforms, software, and tools—much of it legacy infrastructure—remains a key challenge for bank CIOs. Banks' success in digital transformation will ultimately depend on how strategy, technology, and operations work together across different areas of the enterprise. We refer to this as a "symphonic enterprise," where different technologies and solutions are seamlessly meshed to create maximum value. Also, we suggest that firms give precedence to excelling at data management, modernizing core infrastructure, embracing AI, and migrating to the public cloud in their ongoing digital transformation in 2019.

Meanwhile, the relationships between banks, fintechs, and bigtechs are evolving rapidly. Fintechs are no longer seen as scrappy adversaries—collaboration with incumbents is more the norm. With increasing industry convergence, the relationship between the banking industry and bigtechs can be characterized as a bit guarded. Banks need bigtechs, and in some ways bigtechs also need banks, as the banking industry remains a big revenue source for most technology companies.

In the risk management domain, banks appear to be entering a new stage, as digital transformation and externalization gain ground. Although in recent years banks have made notable advances in how they assess and mitigate risk across the enterprise, current systems may be less equipped to manage emerging risks. The growing complexity of algorithms could be problematic even as banks deal with new challenges related to data protection and privacy. Increased connectivity with third-party providers and the potential for increased cyber risk remain a top concern.

Responding to change through strategic transformation

So, given the above realities, how should the banking industry prepare for 2019?

As the environment is shifting, banks will want to double down on transformation while also using this opportunity to reimagine change from a more holistic, long-term perspective and "change how they change," in terms of priorities, speed and execution.

There may be no better time than now to reimagine transformation. We urge banks not to become complacent. The economic cycle is bound to turn at some point. Use recent fortune to invest wisely and pursue change with clarity and conviction.

Please read our 2019 Banking and Capital Markets Outlook to learn more about how banks can pursue strategic transformation in the following areas: Regulatory compliance, tax, technology and data, risk, privacy, and talent.

The report also covers our expectations in seven primary business segments (See figure 1):

1. Retail banking
2. Corporate banking
3. Transaction banking
4. Investment banking
5. Payments
6. Wealth management payments
7.  Market infrastructure

Figure 1: Reimagining transformation in baking and capital markets

Source: Deloitte Center for Financial Services analysis