Wholesale Banks and Asset Managers - The World Turned Upside Down
We see a reversal of fortunes for wholesale banks and asset managers. The effects of Quantitative Easing (QE) and bank regulation drove a $100BN divergence in revenue performance in favour of asset managers since 2011. This now looks set to go into reverse as asset managers face growing fee pressures and wholesale banks benefit from shifts in policy, technology, and operating leverage. The gulf between winning and losing firms will widen.
Key Implications for Asset Managers
Sustained fee pressure is a growing threat for Asset Managers; the shift to passive is well understood, but the market may have underestimated the extent of change underway in active, hence downside risks outweigh the potential upside. The core proposition is evolving, blurring traditional product lines; for example, asset allocators using ETFs, and traditional asset management encroaching on alternatives. Operating model reform will be required to defend profits – specifically cost reduction.
Key Implications for Wholesale Banks
Policy shifts have radically improved the outlook for wholesale banks and they can now see a clear path to above hurdle returns; however, uncertainty remains. Technology transformation will gather pace and has the potential to transform the cost base, while simultaneously opening the door for new competitors. As capital pressures ease, structural shifts in the client base will redraw the battle lines for wholesale banks and we expect the spread of returns across banks to remain wide as the effects of operating leverage and capital play through.
How a GCC Bank Unleashed the Full Potential of its Procurement and Vendor Management in Just Six Months
A Case Study
Banks in the Middle East have long outperformed international benchmarks, supported by strong growth, high profit margins and competitive operating costs. But the recent economic downturn has put revenues under pressure and experts expect risk-associated costs to materialize in the near future.
To maintain profitability, banks must get ready to monitor many more people-costs, as well as external expenditure, which accounts for between 32% and 49% of all operating costs. Our experience, suggests that combining the right strategies and techniques can reap substantial value. The case study attached here outlines how we helped a regional mid-size bank to upgrade of their procurement and vendor management, reducing external expenditure by 15% and procurement organizational costs by 20% in just six months.
African banks find themselves on a perilous path as they navigate the challenges presented by low banking penetration rates and a highly competitive market. But from these pressures are great opportunities.
It is no secret that high mobile phone usage rates have proven a great way for banks across the region to connect with new customers and tap into the previously unbanked. It is driving widespread innovation across the sector and it’s showing no signs of slowing down. Banks are leaping at the chance to adopt new technologies that are allowing them to develop new ways of doing business. They’re changing the way they connect with their customers, they’re enhancing their value propositions and they’re optimizing their operations along the way.
Ultimately, financial institutions are realizing that they need to leverage digital across all areas of their operations to maximize growth. They can do this by developing the technology themselves or partnering with the fin-techs and mobile network operators that already have successful mobile wallets, mobile payments and popular e-commerce offerings on the market.
In this regional review produced in collaboration with Efma ,we present the main challenges and opportunities that banks across Africa face as they seek to connect with a new generation of customer and put digital at the center of their business models. We hear from the local industry’s leaders, including Nedbank Group, Mauritius Commercial Bank and Sterling Bank about how they’re embracing the latest technology advances to offer exciting new customer experiences and product offerings in a more cost-effective manner, and tackle financial inclusion head on. In our roundtable article, we gather perspectives from senior executives at some of the continent’s largest banks on digital opportunities and how the retail banking landscape is evolving. Finally, we share some of the most exciting innovations that have been introduced to the market within the last year.
Increasing Productivity By More Than 20% Through Re-Organization
A Case Study
The challenges faced by banks in the MEA region in the current economic environment have meant that operational efficiency and improving productivity has never been as critical as it is today. The changes have been dramatic in recent times and banks are now looking at costs (and how to reduce them) in a very different light.
Our experience suggests that combining the right strategies and techniques can reap substantial value. The case study attached here outlines how we helped a regional mid-size bank achieve 20% productivity improvement through reorganization.
The success encountered at this client has led us to offer the proposed initiatives more widely. Obviously the recommendations which are presented would need to be considered in light of each bank's specific situation.
In our new report Running faster to stand still, published jointly by Oliver Wyman and Deutsche Bank, we find wealth management valuations are at record highs since the global financial crisis, primarily driven by recent growth in lending products. But we now expect asset growth to slow, costs to rise and fee pressures to accelerate. Competition is increasing. One-third of industry profitability could be at risk over the next five years. Wealth managers must consider a range of strategic and tactical levers to address this challenge - they have to run faster to stand still. As the relative wealth wallet shifts away from managed assets, winners will tap into unbanked assets as a new source of value creation.
There is a growing realization that distributed ledger technology — popularly known as blockchain — will bring a radical shift in the way we think about financial assets and the way the financial industry will operate in the future. The blockchain journey is likely to be long and the outcome is uncertain, but a consensus is forming that it is the real deal. Disregarding it is a risk.
In this joint report with J.P. Morgan, we argue that asset managers need to get off the sidelines and take the initiative to understand and embrace blockchain. The report is designed to serve as a guide to how the technology may evolve, the impact it can have on asset managers, and the action they can take. Like any guide, it is not comprehensive — blockchain is a complex technical topic and the many initiatives it has spawned are too wide-ranging to be encompassed in any single document. Rather, we have imagined ourselves in the driver’s seat of an asset manager organization and have raised the questions that the industry needs to address. For each member of the senior management team, we lay out a set of five key actions as they begin the journey.
How to improve productivity by 25% in a bank operating at a 35% cost-income ratio
A Case Study
The challenges faced by banks in the MEA region, in the current economic environment has meant that operational efficiency and cost reduction have never been as critical as they are today. The nature of their business and their value to customers has changed so dramatically in recent times that, in order to cope with these new challenges, banks are looking at cost (and how to reduce it) in a very different light.
Our experience, suggests that combining the right strategies and techniques can reap substantial value. The case study attached here outlines how we helped a regional mid-size bank achieve 25% productivity improvement in a full year leading to a cost-income ratio of about 30%.
The success encountered at this client has led us to offer the proposed initiatives more widely. The operational efficiency solutions can be offered in a variety of formats. To make the experience more tangible, relevant and educational, the suggestions can be tailored to the situation of each client and are set up to use company-specific metrics, including cost to income ratio and back office to total operating costs.
The report includes an analysis of nearly 400 financial services organizations in 32 countries, a survey of 850 financial services professionals around the world and interviews of more than 100 senior female and male leaders.
Female representation is growing on financial services boards (20% in 2016) and executive committees (16% in 2016), but progress is slow. At current rates of growth, financial services globally will reach 30 percent female executive committee representation by 2048 only. Moreover, progress seems to have slowed in some geographies, compared to what we found out in 2014.
In this report we have also identified the critical point in many women’s careers: the mid-career conflict, where the costs and benefits of a career in financial services seem to be out of balance for many.
Why Bank Transformations Often Fail in Emerging Markets
Lessons to the boards from the field
When the global financial crisis tsunami ended, emerging market banks temporarily washed up on calmer shores. But a tidal wave of changes — from re-energized global players to local consolidation — is now hitting many financial institutions in the developing world. While some emerging market banks have evolved and adapted to these new realities, plenty of others have not. As many face negative annual profit growth rates, they’re embarking on transformation projects to help them stay afloat — and hopefully sail ahead — in the industry’s increasingly choppy waters. A risk of failure is nearly inevitable, after all, at a time when companies are trying to do so much: these wide-ranging, all-consuming projects often mean doing everything from upgrading technology platforms to re-engineering branch network, operating models and sales channels all at the same time. Transformation projects are once-in-a-generation, bet-the-bank moments that are defined by their truly ambitious goals.
We typically see banks launch these transformation projects amid one of three circumstances. One is that their operating model has run its course and growth begins to stall. Another is that an international expansion has failed. The last is that the bank has had a change in leadership at the top who intends to chart a new course. Whatever the reason they have begun, transformation projects typically fail not just because of their complexity, but because of common, seemingly small mistakes. They focus too much on planning and design rather than the challenges of execution. Finally, they zero in too much on what has worked at other banks—rather than on the universal missteps that all too many companies take.
This paper draws from 15 years of working on transformation projects at emerging market banks and is told through firsthand examples from the field .It also shares those hard-learned lessons, as well as strategies to avoid them.
With the start of the internet era in the mid-1990s, people began talking about the “disintermediation of banks”. Internet banking and the declining use of cash and cheques would render the standard banking model obsolete. The value of branch networks would collapse and banks would be unable to compete with new players enjoying far lower operating costs.
Initially, little happened. In fact, from the mid-90s to 2007, banks in Europe and North America enjoyed unprecedented returns. This boom ended abruptly with the financial crisis of 2008. Banks have since been struggling with recession, recapitalisation and re-regulation. Now, to make matters worse, the predicted disintermediation shows signs of coming true. Specialist financial technology firms (FinTechs) and entrants from other industries, such as search engines and insurers, threaten to disrupt the banking market, ending the domination of the large traditional banks.
It hasn’t happened yet. But banks cannot afford to be complacent. Economic history is full of business models destroyed by new technology. And digital technology is especially disruptive because it allows businesses to expand very rapidly. A firm operating out of a basement in Boston or anywhere else can reach customers all over the world. Customers can be acquired at almost zero cost and in the few seconds it takes to sign up online. And scale can be increased at little more expense than the acquisition or rental of more servers. Digital technology has already transformed several industries, not only by digitalising the sales process but, in some cases, the product. Blockbusters and Borders branches have closed down not only because movies and books can more conveniently be ordered online but because they have become electronic products, deliverable online. Does a similar fate awaits today’s large incumbent traditional banks? Or, more positively, what can banks do to avoid suffering the same fate? That is the question addressed in this Oliver Wyman Perspective.
It is ironic that the telecommunications industry stands at the foundation of major digital industry disruptions, yet the business model of telecom operators has not materially changed since the late 90’s.
We believe that this situation will change, and that it will change rapidly. In this article, we expand on our belief and argue for a digital transformation of the telecoms industry; with the crucial difference to many other industries being that we see telco operators leading this change, rather than suffering an outside-in imposition of third parties. A successful digital transformation must start with a substantial improvement in the current telco customer experience.
Digitisation is a wake-up call for the telecoms industry. In a rapidly changing digital world, the cards are now being dealt for a new game – one in which competitive stability is no longer the norm and where the most agile companies will outsmart the rest. This edition of the CMT Journal represents some of our latest thinking on the opportunities and challenges in this exciting industry.
The first section of the journal focuses on how telecoms operators can change to remain relevant for their customers in a digital world. In the second section, we look at how operators can create a value proposition that is sufficiently differentiated to mitigate the ill effects of a commoditising market. In the third section, we turn our attention to the telecoms network and how it is likely to change fundamentally in the future. The journal concludes with our views on how the ecosystem is changing and why the present disruption to the international roaming market could well become a tsunami for the industry.
Sub-Saharan Markets Outlook: Survival of the Fittest
Throughout the first decade of the new millennium, sub-Saharan African telecommunications markets showed accelerating growth. Around 2010, an inflection point was crossed and the competitive climate has been worsening ever since. The players who are to emerge as winners will have to excel at the basics and achieve scale and leadership – and quickly. Those companies not up to the task? They should get out now.
Opportunities and Challenges in the Middle East and North Africa Media Production Market
While the region has some obvious strengths, like its diverse and unique locations, ecosystems in MENA need to focus on some specific priorities in order to advance. Three potential actions to develop production eco-systems are: developing incentives to attract global film production, improving TV audience measurement and enabling a creation of a readily available pool of production talent. Improvements in each area will enable the MENA region to open up to global production markets and also foster organic growth of local Arabic content production.
ICT has played a significant role in transforming economies and societies for the better. As a pervasive tool that extends across many sectors and functions, it has allowed companies to become global and more productive, enabled citizens to gain empowerment, and provided opportunities for economies to grow.
This has been possible thanks to a virtuous dynamic process fuelled by continuous innovation and investment. This process is likely to continue at an accelerated pace as a result of developments like the Internet of Things (IoT) and the upcoming connection of another billion people to ICT networks and services.
Since ICT has become a key to competitiveness, governments, businesses, and consumers should prepare themselves to make the most of it or risk becoming sidelined.
Oliver Wyman Middle East’s latest publication evaluates ICT’s socio-economic contribution and acts as a call to action for stakeholder to work together towards new approaches to investment and innovation driven regulation.
We live in fascinating times in which the energy sector is playing a major role. It is a sector in transition, driven by a number of factors. There is intense competition across the world in terms of the sources of energy, the generation of energy and how it will be distributed.
We are seeing persistent economic and political volatility which is creating complexity for the sector as a whole. There is a change in regulatory environments by region; and we are also seeing increasing politicisation of the Energy agenda; as well as the emergence of new technologies that are fundamentally changing the economics of the industry. The transition from fossil fuels to low or no-carbon sources – triggered by a confluence of new technologies, cheaper alternatives, and a raft of new international agreements and rules to reduce greenhouse gas emissions – is proving to be a crucial catalyst for accelerating this transformation.
It is in the backdrop of this scenario that we present to you our perspectives and insights in the third edition of the Oliver Wyman Energy Journal, to represent the latest thinking across our global energy practice on current and emerging opportunities, and risks facing the industry.
Change has become the only constant for today’s energy industry. Unprecedented shifts are forcing oil and gas companies, utilities, governments, investors, regulators and even consumers to rethink basic assumptions that have guided the energy sector for decades worldwide. To stay ahead of the profound transformation under way, business and government leaders must forge new strategies, operating models and risk mitigation tactics.
With this in mind, it is our pleasure to share with you the second edition of the Oliver Wyman Energy Journal. This collection of perspectives represents the latest thinking across our Energy practice on the resulting new risks and opportunities that will impact not just the energy sector, but also every company and person that depends on it.
Engaging The Private Sector In Critical National Development
As passenger volumes continue to grow and airlines worldwide expand their fleets, airport infrastructure is fast becoming a growth bottleneck.
The delivery of sound and reliable infrastructure – from roads and bridges to public utilities – is a fundamental driver of economic growth, and the demand for such services is expected to surge over the coming years. Unfortunately, the allocation of funds for infrastructure projects is insufficient to cope with this projected increase in demand.
An annual figure of almost US$2.7 trillion is being invested worldwide each year, in infrastructure which corresponds to just under 4% of global GDP. Despite this, the global funding gap is widening. An estimated annual spend of US$3.7 trillion would be needed to meet the growth in infrastructure demand. The US$1 trillion gap1 represents a 27% shortfall in global infrastructure investments, highlighting an urgent need for new investment sources to be identified.
This increase in demand calls for significant commitments to infrastructure development. In developing economies like the Gulf Cooperation Council (GCC), the most important drivers of the surge in demand for infrastructure are urbanisation, industrialisation, and population growth.
This report, explores the benefits of engaging the private sector in infrastructure development across the Gulf Cooperation Council (GCC) and recommends five action steps for GCC governments to ensure successful public-private partnerships:
- Defining objectives
- Setting up an effective central authority to oversee the program
Leveraging the Private Sector to Improve Airport Infrastructure
Upsides and Risks of Airport Privatisation
As passenger volumes continue to grow and airlines worldwide expand their fleets, airport infrastructure is fast becoming a growth bottleneck.
Privatisation has an important role to play in eliminating this barrier to growth, and its execution around the world has evolved significantly over the past 25 years. During that time, key lessons have been learned from successful transactions:
- Clear objectives are required to guide scope and transaction design
- Well-defined governance structures are needed, to ensure the initial strategy is followed
- Regulatory frameworks need to be established before privatisation is launched
- Transparent communication with stakeholders is required to build public support
This paper examines those issues and outlines what can be done, by governments and potential investors, to ensure successful airport privatization ventures.
Member countries of the Gulf Cooperation Council (GCC) need to become more resilient in the face of a geopolitical environment that has grown much more challenging in recent years. An important component of the GCC’s resilience in security going forward shall be self-reliance in its defense industry.
Until now, almost all of the billions of dollars spent on arms have gone to foreign suppliers. In the future, the GCC must focus on developing a domestic base of defense manufacturing to enhance the region’s capability to address a range of conventional and asymmetrical threats ranging from terrorists, cyber attackers among others.
This will require a new vision for each country’s defense policy, focused on domestically building unmanned aerial vehicles, computer and communications systems and other strategic capabilities. These changes will reshape the GCC’s security posture to rely less on foreign suppliers and more on the homegrown capabilities of local defense industry champions. All this cannot happen overnight, but if the GCC makes a concerted effort to move in this new direction, in ten years it will have transformed its defense capability and its relationship with friends and foes.
Creating a Sustainable Privatisation Program in the GCC
Learning Lessons From Past Failures
In recent decades, both developed and emerging economies have reaped clear benefits from privatizing state owned enterprises (SOEs). While Gulf Cooperation Council (GCC) countries have been absent from this trend, large budget deficits due to recent oil price declines have made privatization a top priority for governments in the region. This report highlights the opportunities and challenges facing GCC countries trying to privatize SOEs. It describes the key success factors required to make privatizations effective in the region. Lastly, it argues that the potential benefits of privatization go beyond improving the fiscal balance of governments. If executed correctly, privatization can also contribute to the economic and social well-being of the region. As such, it should be seen as an integral part of the economic transformation plans of GCC countries.
Rapidly evolving risks are creating new threats and opportunities.
Our sixth edition of the Oliver Wyman Risk Journal presents our firm’s latest thinking on many of management’s toughest challenges globally: blistering technological change, cyberattacks, volatile energy prices, rising healthcare costs, and structural risks emerging from social trends.
Harnessing the potential of digital innovations is one of the great management challenges of our time. Discovering new digital ways to improve a business requires not only staying on top of developments within the same industry – but also in other industries and countries.
Ten Digital Ideas from Oliver Wyman explores how leaders in industries ranging across financial services, manufacturing, transportation, healthcare, retail, energy, and logistics are capitalizing on digital innovations.
The role of private and non profit sectors in the GCC
Against the background of falling oil prices and other challenges that the GCC region is currently facing, economic and environmental sustainability has become more important than ever. While the prevalence and effectiveness of non-governmental sustainability initiatives remains low in a region historically reliant on government policies and spending, there are nonetheless important positive trends that can be noticed.
In this context, Oliver Wyman surveyed more than 60 decision makers in the region to study the role that private and non-profit sectors across the GCC are playing when it comes to social and environmental sustainability in the region. The report outlines key insights drawn from this research and highlights the range of social impact opportunities that are available for the private and nonprofit sector in the region.
It also covers examples of best practices from companies showing how to effectively implement such models.
The report suggests that though some key steps have been taken towards sustainability, it is not enough in the current scenario and urgency of the region's challenges. The coming years will be critical to consolidate and build on these early gains, while ensuring reinforced support accelerates the pace of change.