Banks demonstrate an appetite for M&A and transformation

Transformation tops the agenda, but strategic reviews may be driven more by tactical thinking than purposeful transformation.

Banking and capital markets firms have been under considerable pressure during the COVID-19 pandemic. According to the latest EY Global Capital Confidence Barometer (pdf), the impact of lockdowns and a slowdown in the world economy have had a negative impact on revenue and profitability for more than 90% of banks. And while many banks generally have been able to respond well to the pressure of the pandemic, the crisis has highlighted key areas of weakness in some banks’ operating model.

Lessons from 2020 serve as a catalyst for transformation

Overall, 65% of banking executives say their company outperformed peers on digital transformation, as banks accelerated their digital investments to meet and capitalize on heightened levels of customer digital adoption. Meanwhile, with banks supporting their retail and wholesale customers through periods of financial difficulty, strengthening their connections with the communities in which they operate, 54% say they outperformed in engaging with communities and society.

However, some banks have found that legacy technology or processes, or those of their suppliers and partners, have struggled to flex and adapt to accelerated digital needs, such as remote working, during the pandemic. Eighty-five percent of banks say their organization is currently undergoing a significant business or technology transformation program, with nearly a quarter indicating the triggering factor was the pandemic.

In response, banking executives are being bold and forward-looking as they make plans to increase investment across the organization, with 69% saying they plan to boost their investment in digital transformation, 64% are looking to pour more into customer engagement, and 61% want to put more energy and money into identifying, evaluating and responding to emerging risks in real time. 

Of course, these initiatives are taking place in a climate of uncertainty that has 86% of banking executives delaying or stopping planned investments as a result of ongoing geopolitical challenges. This uncertainty is unlikely to diminish anytime soon. As such, agility will need to be central to successful transformation.

Banks look to seize the opportunities amid disruption … but are they being strategic or tactical?

In addition to serving their clients and supporting their people, banking executives see the pandemic as an opportunity to reimagine their business models, both to future-proof the business and to drive growth. Nearly all (93%) of banking respondents say their organization conducted a comprehensive strategic and portfolio review in 2020. 

Banks clearly recognize the importance of a streamlined business model that genuinely creates value for their clients and improves profitability. Half of bank executives say they are looking to divest or exit underperforming products or services as part of their digital transformation initiatives.

However, banks may want to be asking a fundamental question: does my strategic review translate into strategy-driven transformation? 

Only 37% of banks surveyed say that their transformation programs are being driven by the need to redefine purpose or strategic objectives, or by changes in the business ecosystem. The remainder cite short-term drivers of transformation, such as the pandemic, geopolitics or cost reduction. Further, of those driven by changes to the ecosystem, the vast majority (95%) say they need to define their future role in the ecosystem and 90% say their organization needs new skills and processes to operate effectively in an ecosystem. This will be a key area of focus for those wishing to be best positioned during and post-COVID-19 recovery.

More evidence that banking executives are thinking more tactically than strategically appears in the 65% who say that delivering cost reduction is a key priority of their transformation program, vs. 49% who are focused on a flexible operating model and cost base and 41% who want to create a more scalable operating model. To put this approach in perspective, the largest 200 banks would need to cut costs by approximately US$250b to deliver an average 10% return on equity. The hard truth is that cost reduction alone is unlikely to deliver the long-term shift in performance that banks are looking for. Rather, flexibility and agility will be key to seizing opportunities during the recovery period and capturing the upswing.