A confluence of factors will combine to create a tough backdrop for major bank boards and senior management teams over the coming years, according to professional services giant KPMG.
In its Major Australian Banks: Full Year Results 2015 report, KPMG forecasts a subdued economic environment continuing, sustained low interest rates, downward pressure on net interest margins, weak demand for loans (and hence, slowing lending growth) and deteriorating credit quality.
“Furthermore, as a consequence of the FSI recommendations and the global regulatory community advancing with Basel 4, the Net Stable Funding Ratio and Leverage Ratio, regulatory capital and liquidity will continue to rise, making it increasingly difficult for the major banks to maintain their current level of ROE and high dividend payout ratios,” the report said.
In addition, the KPMG report highlighted that customer behaviour and competitive dynamics will continue to rapidly evolve, driven by demographic changes, the digital/mobile revolution and the rise of fintech, presenting both threats and opportunities for the major banks.
“In order to enhance their level of agility, the majors will need to intensify their efforts to simplify, standardise and automate their operating models, as well as preserve optionality in their strategies in order to capitalise on opportunities as they arise,” the report said.
KPMG believes that branch networks will become a key source of medium-term productivity enhancement opportunity for the majors. However, over the longer term, the report predicted that big banks will be able to close a modest number of branches without negatively impacting customers.
“Branches are getting smaller, more differentiated, situated in higher ‘footfall’ areas, with fewer teller staff, and orientated to activities, such as sales, the provision of advice and education of customers about how to use digital services and self-service capabilities,” the report said.
“However, in an era of lower credit and bank revenue growth we consider that over the next five years, with consumer transactions in branches continuing to decline between 10-15 per cent a year, coupled with consumers (of all ages) being more willing to embrace the convenience of self-service, that the major banks will be able to approach more radical branch transformations, including a modest level of branch closures, while at the same time not negatively impacting their reputation, customer engagement and advocacy.”
KPMG believes that digitising the front office is not enough to realise true cost efficiencies if the bank’s culture, organisational alignment, and human resources are not redefined to deal with digital disruption.
The report said that failure to look across the firm’s value chain (front office to back office and support) continues to cause inefficiencies in realising the benefit of front-office automation and migration to digital channels.