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www.af.capital Banking Industry Overview: 2016 State / Regulations / Trends / Challenges
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www.af.capital
Banking Industry Overview: 2016
State / Regulations / Trends / Challenges
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Summary
w Economic Outlook: what’s happening in the world
3 w Regulatory Outlook: what regulators are doing and how banks will address
13 w Key Trends: what the global banks in 2016 are up to
22
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Economic Outlook
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Summary
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Economic Outlook Summary for 2016: unstable slowness
w 2015-2016: Slight economic growth after crisis, with low inflation, low interest rates
w We have slowest economic recovery in recorded history
w Developed markets have very slow unsustainable growth
w Emerging markets still in trouble: 3.2% median growth
- It is the slowest EM growth since the 1998 crisis
- China growth is slowing (10% à 7% à ~5.5% forecast)
- Many EMs are in deep recession: Brazil, Russia
w Impact of declining oil price is negative (still too much oil)
w Forecast is not improving: divergence of economic
growth across the globe continues to increase
Source: International Monetary Fund (data 2015-2020 based on IMF projections)
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Banking Industry: no longer a Klondike after 2008
w Return on Equity (ROE) felt below 10% for top-10 global banks: no more “easy” money
Source: Roland Berger
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Banking Industry: the new post-2008 reality
w Regulatory tightening: US / EU / APAC regulators do not want a new “2007-2008 crisis”
w Investors expecting ROE ~9% over 2015-2017 instead of previous 16-20%, and this is still below cost of equity: shareholders are losing money on banks’ stock shares
w The need for deleverage (reduce debt and risky assets / businesses) because Capital Ratios (RWA) effectively doubled under new regulatory demands
w Much higher expenses for restructuring, litigation and regulatory compliance
PROFIT
REDUCTION Source: AF Capital, Roland Berger
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w Litigation costs (regulatory fines and client settlements for market misconduct) are severely driving Cost / Income (profitability) ratios down
w Fines exceeded US $230+ billion (US $120+ billion for U.S. mortgages, others are for FX trading misconduct and LIBOR manipulation felonies)
Litigation charges: the price to pay for 2000’s sins
Source: AF Capital, Roland Berger
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Investors sell banks… again
w Investors sell bank shares and de-value stock price multipliers: banks “Price / Book Value” ratio reduced by 50%, shares dramatically fell
Source: YCharts.com
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… and banks are responding
w Banks are responding and trying to improve profitability and share price:
- Optimize certain business lines (e.g., Deutsche Bank re-structures Rates business);
- Exit certain activities (e.g., UniCredit exits Equity business, Deutsche Bank exits Commodities and CDS clearing);
- Refocus on a more profitable business (e.g., UBS focuses on Wealth Management);
- Sell assets which require much capital or non-core assets (e.g., Deutsche Bank to spin off Non-Core Operational Unit);
- Optimize operational and IT costs
w These single steps are insufficient and more complex strategies are required by investors (e.g., Deutsche Bank’s “Strategy-2020”)
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Example: Deutsche Bank’s “Strategy-2020”
Source: Presentation of Strategy-2020 execution by John Cryan (CEO) and Marcus Schenck (CFO), London, 29 October 2015
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Regulatory Outlook
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Basel 4: Planned RWA inflation in 2019
w RWA (Risk-Weighted Assets) is the sum of all bank’s assets weighted by its riskiness
w Basel 3 (current): bank must hold reserved capital > 8% of RWA; Basel 4 needs more RWA
w Example: Deutsche Bank needs to reduce RWA by ~20% (EUR ~90 bln) before 2020
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Source: Presentation of Strategy-2020 execution by John Cryan (CEO) and Marcus Schenck (CFO), London, 29 October 2015
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Basel 4: Minimum required capital ratio (CET1) is still above
w Tier 1 capital ratio = <bank’s core equity capital> / <total risk-weighted assets (RWA)>
Source: Presentation of Strategy-2020 execution by John Cryan (CEO) and Marcus Schenck (CFO), London, 29 October 2015
Example: Deutsche Bank needs grow CET1 capital to achieve target capital ratio, EUR bln
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Basel 3 (E.U.): Leverage ratio (CRD4) to reduce by 2018
w Capital Requirements Directive IV (CRD4) is a supervisory framework in the EU which reflects Basel III rules on capital minimum standards
w CRD4 is in force since 1st January 2014 but needs its full implementation by 1st January 2019
w Leverage ratio = <Tier 1 Capital> / <Total Exposure> and it must be >= 3%
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Source: Presentation of Strategy-2020 execution by John Cryan (CEO) and Marcus Schenck (CFO), London, 29 October 2015
Example: Deutsche Bank needs to reduce CRD4 exposure
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U.S.: Intermediate Holding Company (IHC) to launch in 2016
w Each non-U.S. financial organization having U.S. legal entities with >$50 bln assets must have an operating IHC
w IHC is a fundamental change to non-U.S. banks’ governance model in USA
w IHC must be capitalized and operational by July 2016
w IHC to participate in CCAR in April 2017 (private) and April 2018 (public)
Source: Davis Polk, USBasel3.com
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U.S.: Comprehensive Capital Analysis and Review (CCAR)
w CCAR is a regulatory framework introduced by the Federal Reserve (USA) in order to assess, regulate and supervise large banks
w Assessment is conducted annually and consists of two related programs:
- Comprehensive Capital Analysis and Review (CCAR)
- Dodd-Frank Act supervisory stress-testing
w Core part of the program assesses whether:
- Bank has sufficient and adequate capital
- Capital structure is stable under stress-test scenarios
- Planned dividends are acceptable and will not bring the breach of minimum capital requirements
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E.U.: MiFID 2
w The second version of MiFID directive
w Extends MiFID coverage onto new asset classes and markets where centralized bid/offer markets and pre- and post-transparency have never existed
w Tremendous impact on how OTC markets operate in Europe
w Summary of MiFID 2:
- Addition of previously-unregulated organized trading facilities (OTFs);
- New customer safety for algorithmic (Algo) and high-frequency trading (HFT) activities;
- Additional supervision of derivatives markets (coordinated with ESMA);
- Stricter requirements for portfolio management, investment advice
- Other investor protections
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Other regulatory upcomings in 2016
w Basel Committee: Net Stable Funding Ratio to be obligatory in USA
- Need to hold cash to cover potential losses during the year
w Federal Reserve: Enhanced Prudential Standards in to force in USA
- Need to build independent risk management function instead of Middle Office in business lines
- Each banking fin.org with U.S. legal entities with >$50bln assets must have an operating IHC
w Financial Stability Board (FSB) and Basel: Culture and Ethic Standards in banking into force
w Dodd-Frank (USA): Living Wills are mandatory for banks with >$50 bln assets – a detailed trouble resolution financial plan
w Enhanced consumer protection in USA
w Emerging detailed requirements to care about Cyber risks in USA
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Banks to build controls to avoid further litigation burden
w Implement better AML
w Implement better KYC
w Review client relationships in risky countries
w Ethics code to be introduced and accountability for conduct issues across the bank is the key
w Align reward system to better reflect ethics and conduct
e.g., DB Letter to Shareholders, March 2016:
Source: Deutsche Bank Annual Report 2015
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Key Trends in banking
for 2016
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Trend 1: Disruptive players (FinTechs)
w Fintech firms are targeting profitable aspects of the banking business. Banks are scared!
w More than 20% of financial services business is at risk to FinTechs by 2020
Source: PwC, Capgemini
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Trend 2: Banks focus on investments into innovation
w Technology is evolving so fast that banks must adapt to retain customers
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Trend 3: Banks invest into Cyber-security systems
w Banks are facing unprecedented challenge of data breaches
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Trend 4: Digitalization
w Banks are leveraging digital technologies to enhance customer experience
w Saving on personnel and physical branches for the sake of better and integrated customer channels
Source: Juniper Research
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Trend 5: Banks are using Clouds for core activities
w Banks are investing heavily into cloud services for its core business activities
w Those who adopted earlier have significant benefits in cost savings, IT agility, scalability
Source: Gartner, Capgemini
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Trend 6: Banks are simplifying architecture and rid of legacy
w Increased regulation requires more IT platform agility and sometimes near-real-time data
w New channels and products require fast time-to-market which legacy systems can’t provide
Source: AF Capital, Capgemini
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Trend 7: Blockchain and distributed ledgers
w Bitcoin demonstrated the strength of distributed ledger idea
w Blockchain technology is expected to reduce banks’ infrastructure costs by ~$20 bln p.a. by 2022
Source: AF Capital, Capgemini, Santander InnoVentures, Oliver Wyman
w Deutsche Bank is researching the use of blockchain for AML and KYC
w Citibank, HSBC and other 40 banks have partnered with R3CEV (Blockchain tech Co.)
w RBS is developing blockchain PoC as part of £3.5 bln IT upgrade
Since 2015 industry is moving:
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Trend 8: Big Data and advanced analytics
w Basic BI using traditional DWH now takes only 28% of all data initiatives
w Advanced analytics include predictive analysis, data mining, Big Data, simulation, optimization, location-based intelligence
Source: Gartner, Capgemini
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Copyright © 2015, Luxoft Holding Inc. All rights reserved.
The information contained in this document is Luxoft confidential information.
No part of this publication may be stored in a retrieval system, transmitted, or reproduced in any way, including but not limited to photocopy, photographic, magnetic, or other record, without the prior agreement and written permission of Luxoft.
This document is provided for informational purposes only, and the information herein is subject to change without notice. Please report any errors herein to Luxoft. Luxoft does not provide any warranties covering this information and specifically disclaims any liability in connection with this document. The terms of this OTC Derivatives Reporting Service Offering are subject to the terms of relevant signed agreements and related addenda. Luxoft reserves the right to administer the OTC Derivatives Reporting Service Offering in its discretion. Luxoft may make any of the benefits in this OTC Derivatives Reporting Service Offering available to any Partner, and/or withhold any benefits from any Partner, without obligation to offer or withhold such benefits to or from any other Partner. Partner agrees that it is responsible for all of its employees’ compliance with the terms of this OTC Derivatives Reporting Service Offering and the relevant agreements signed with Luxoft.
Copyright © 2015, Luxoft Holding Inc. All rights reserved.
The information contained in this document is Luxoft confidential information.
No part of this publication may be stored in a retrieval system, transmitted, or reproduced in any way, including but not limited to photocopy, photographic, magnetic, or other record, without the prior agreement and written permission of Luxoft.
This document is provided for informational purposes only, and the information herein is subject to change without notice. Please report any errors herein to Luxoft. Luxoft does not provide any warranties covering this information and specifically disclaims any liability in connection with this document. The terms of this OTC Derivatives Reporting Service Offering are subject to the terms of relevant signed agreements and related addenda. Luxoft reserves the right to administer the OTC Derivatives Reporting Service Offering in its discretion. Luxoft may make any of the benefits in this OTC Derivatives Reporting Service Offering available to any Partner, and/or withhold any benefits from any Partner, without obligation to offer or withhold such benefits to or from any other Partner. Partner agrees that it is responsible for all of its employees’ compliance with the terms of this OTC Derivatives Reporting Service Offering and the relevant agreements signed with Luxoft.
Copyright © 2016, AF Capital Holding JSC, Russia. All rights reserved.
The information contained in this document is AF Capital Research property.
No part of this publication may be reproduced in any way, including but not limited to photocopy, photographic, magnetic, or other record, without the prior agreement and written permission of AF Capital.
This document is provided for informational purposes only, and the information herein is subject to change without notice. Please report any errors herein to AF Capital. AF Capital does not provide any warranties covering this information and specifically disclaims any liability in connection with this document.
