Driving profitability in a low-rate world: The state of the banking industry

Driving profitability in a low-rate worldThe state of the banking industry

© 2016 Grant Thornton LLP. All rights reserved. 2

IntroductionBanks have already gone through multiple rounds of cost cutting, but they must also address the fundamental complexities in their business models to drive profitability in the current low-rate environment. This is a tough challenge. Since opportunities for top-line growth are scarce, the ability to invest in the required transformation is significantly reduced.

In the face of this challenge, bankers should ask themselves:• Is simplification the way to go?• How can I combat rising compliance costs?• What do I need to do to command a market premium?

Within the following slides we answer these questions and provide insight into the state of the banking industry.


The state of the banking industry

1 Drive simplification throughout the business model

2 Invest in compliance optimization

3 Identify value-added services

As our banking clients plan for and enter 2017, we urge them to take the following actions.


Drive simplification throughout the business model

• Many U.S. banks organize around products such as credit cards or mortgages, which creates duplication and lack of accountability for total aggregate costs

• U.S. banks tend to operate in product and channel silos, duplicating processes and missing opportunities to integrate data

• The steady increase in the number of channels has led to these channels being bolted on to existing solutions

• New channels such as digital and social media have been bolted on to existing solutions

• Legacy solutions need to be re-engineered or upgraded to address the new omnichannel reality

• New market entrants can design a simpler, more intuitive customer experience from scratch

Integrate data across product and channel silos Eliminate unnecessary products and features


• Many regulatory and associated reporting solutions were implemented in a hurry

• Benefit could come from end-to-end process re-engineering, reducing duplication and driving productivity

• Leverage machine learning and analytics to automate repetitive tasks and leverage human intervention where it will most reduce risk

Reduce costs for activities that don't add value Refocus compliance teams to provide a competitive advantage

Others are pushing the envelope further, leveraging cross-bank "utilities" to drive economies of scale.

Invest in compliance optimization


Invest in compliance optimization

• Leading banks are reaching outside their institutions to address core functions that are a source of competitive advantage

• Banks are looking at their nonstrategic processes as the industry aims to operate in a fundamentally simpler way

• Initial utility forays include time-consuming administrative functions such as client screening and third-party risk assessment and monitoring

Explore industry utilities


• Will allow banks to identify and understand individual client segments, life stages, specific life events and needs

• These drive opportunities to provide a richer array of value-added services• These services should lend themselves to additional fees and opportunities for bundling

products and services

Take a customer segment approach

Growth in fee income and the overall contribution of fee income compared to net interest margin will be an important determinant of future profitability.

Identify value-added services


2/3Nearly 2/3 of banking respondents are enhancing GRC activities by focusing more on risk management, and rougly half mentioned refining/improving existing enterprise risk management.

1/3More than a third are integrating GRC into their operations and business strategy.

2/3More than 2/3 indicated that without existing constraints, their internal audit functions could add value to identifying improvement opportunities

More than 40% are implementing data analytics and risk modeling.

40%

SurveyGrant Thornton recently conducted a survey of corporate governance, risk and compliance (GRC) functions, including nearly 100 banks of all sizes


Moving forwardSimply waiting for interest rates to rise is not a strategy. Which banks will be brave enough to come forward with plans for focused and decisive action, accepting that there is only so far that traditional cost cutting can take them?

Nigel SmithNational Financial Services leaderT +1 212 542 9920E [email protected]

Contact "In this environment, even the best-run banks are challenged to deliver a satisfactory return on equity.

And a disturbing number of the largest banks are worth more on paper than their share values reflect – a

situation that's clearly unsustainable." –Nigel Smith, Grant Thornton LLP's national Financial Services

leader

mailto:[email protected]


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Driving profitability in a low-rate world: The state of the banking industry

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