Key trends in the retail banking market
Credit crisis
Started in the last quarter of 2006 and accelerated during 2007, the US credit crunch in the mortgage-backed securities hit many leading banks in the US and Europe. Most of the banks reported lower earnings in retail operations in 2007, reflecting an increase in the provision for credit losses and higher net charge-offs. The slowdown in the mortgage expansion rate has resulted in a substantial shift to credit card borrowing from mortgage debt.
The crisis has spread beyond the US subprime market, to the prime residential and commercial real estate markets, consumer credit, and the low to high grade corporate credit markets. Large financial institutions may face the same problem as Bear Stearns in the future as a result of the current subprime crisis. Bear Stearns has financial problems related to sub-prime mortgage debts and owing to this problem it was acquired by JP Morgan Chase in March 2008.
Driven by the subprime crisis, retail banks will remain in a reactive mode throughout 2008. Most banks intend to tackle this crisis through reallocation of resources from loan production to risk management and foreclosure processes. This will result in reengineering of payments processing, and development of new products for targeted customers. Many retail banks are also opting for developing more flexible payments process with focus on reducing risk, including those not related to consumer lending.
Increasing direct and online banking
The trend towards direct and online banking is driving the retail banking industry in terms of channel usage. The penetration of both general internet usage and of online banking channels has increased sharply in many markets and this trend is expected to gain momentum as adoption rate across all age group increases. The online banking enables the consumers to compare offers and price positions, and thus increases the competitive landscape in the global retail banking. With the use of online banking in Western Europe and North American now fairly mature across most markets, online banking is often one of the main interaction channels for customers (in terms of number of visits/ usage compared to other channels). A continued driver for online investment has been around security and this will remain a major area of spend in 2008, both around improved authentication (e.g. multi-factor authentication / use of tokens) and activity monitoring to identify and react to suspicious activity (e.g. SMS alerts).
Web 2.0 is the other main driver for this increased focus on the online channel and is changing the competitive landscape in the retail banking industry. Banks are working to improve how they engage customers online during the product research and selection phase. Web 2.0 does provide the potential for banks to have a more dynamic online relationship with their customers and the ability to provide services, or integrate with, social networking networks has interesting sales potential. There are numerous examples of Web applications such as retirement calculators, product selectors and guided advice that are helping banks differentiate themselves online. Most of the top ten banks covered in this report are investing on enhancing their products and distribution through online banking. For example, Citigroup acquired Egg Banking, a pure online bank and one of the UK’s leading online financial services providers, from Prudential in 2007. In the same year, Bank of America launched online mobile banking services to target around 21m online banking customers. HSBC launched its online banking and savings offering in 2005, which it continued to grow strongly in 2007 by expanding its service in Taiwan, South Korea and Canada in 2007 and will introduce it into further markets in 2008. Thus, while the branch will remain the dominant channel for investment across all regions, an important investment growth area for banks in 2008 will be online banking.
Cross-border banking consolidation continues
Cross-border banking has become an increasingly important structural feature of the global banking sector. Cross-border consolidation gained a new momentum following the recent $100bn acquisition of ABN AMRO by the Royal Bank of Scotland-led consortium of European banks. The trend in cross-border deals is moving away from US-centric focus, as the centre of gravity of global finances shifts to accommodate the growing wealth of China, India and the Gulf states along with other emerging economies. In 2007, China’s biggest bank, Industrial and Commercial Bank of China, acquired a 20% stake in South Africa’s Standard Bank for $5.6bn. This acquisition was China’s biggest foreign direct investment to date.
Cross-border M&A activities provide a major tool for banks to reap economies of scale, to diversify activities and to spread risks and returns. Pressure on acquiring banks is intense especially in large cross border deals, because of the risk involved in moving into a new geography. It is critical for a bank moving into a new region to successfully act locally without losing its own global advantage. The rapid pace of consolidation across the global retail banking industry is likely to continue through and beyond 2008.
The most common trend followed by most of the top ten banks covered in this report is to grow inorganically. Many banks such as HSBC, Wells Fargo and Wachovia are focused towards M&As to enhance their portfolio, to expand in high growth economies in Asia and to spread risks and returns. The inorganic route increases the opportunity for cross selling, in addition to adding new customers to the banks. The other important trend observed is that many of these banks are focused towards launching innovative products to remain competitive in the marketplace. Bank of
America introduced new products such as No Fee Mortgage PLUS, Mobile Banking, new Risk Free CD products and the new BankAmericard, in 2007, to offer value added products to its existing customers and also attract new customers. Citibank also launched India's first co-branded "Two-in-One" transit credit card in collaboration with the Delhi Metro Rail Corporation in 2008. It has launched similar products in New York and Singapore and expects to launch similar products in more countries in 2008.
The banks are also taking initiatives to reorganize their operations owing to the weakening mortgage business in the US. For example, HSBC has restructured its retail operations in the US, closing about 400 branches and leaving a network of about 1,000 to decrease the costs and exposure to this market. Citigroup is also strengthening its residential mortgage business to achieve greater operational efficiencies. It intends to reduce its US residential mortgage assets by approximately $45bn and cut the amount of new loans to be held in portfolio by more than 50% by the end of 2008. In addition to subprime crisis, ongoing consolidation in the industry and the expansion
of direct and online banking are putting banks under intense competitive pressure, which may lead to increasing M&A activity, particularly in emerging markets.
