Consulting services We are known for what is corporate banking vs investment banking holistic perspective. We cross boundaries with our clients to create value. For many years, corporate strategy languished in banking circles.
During the go-go 1990s and most of the 2000s, too many bankers pursued indiscriminate growth, had a broad appetite for risk and diversified their portfolios without worrying enough about controlling costs or staking out distinctive positions in the eyes of customers. Then, the 2008 financial crisis caused an abrupt about-face from growth to survival. Many bankers wielded blunt restructuring tools to take out costs and deleverage their balance sheets in order to meet regulators’ capital adequacy requirements. While most of these measures were necessary, they certainly did not set the stage for future growth. The times demand that banks relearn strategy. Banks’ sources of revenue have come under pressure: Credit growth has slowed as consumers and businesses have deleveraged, net interest margins have been squeezed, and fee income has come under pressure due to increased competition and consumer watchdogs’ focus on unfair practices.
The new macro and competitive environment means that banks have to adapt through more disciplined strategy. At some banks, what passes for strategy, in fact consists of the pursuit of quarterly profit targets. A long-term growth strategy, by contrast, often means enduring some pain over the short term and explaining to shareholders why it takes time to deliver results. To be sure, many challenges today—including low interest rates, high nonperforming loans in some countries and a regulatory backlash in many regions—have some element of cyclicality. We believe that cyclical effects, though real, do not present a complete picture.
Some banks perform better than others in the same conditions, and the winners over long periods manage the structural as well as the cyclical elements. Clearly, different business choices led to different financial outcomes. For many banks, then, a last call for creating a sustainable advantage is approaching. They will need to stretch dormant strategy muscles at the enterprise level. This goes well beyond ranking current businesses based on their financial contribution, because that exercise cannot predict what will deliver future returns.
A more effective approach to strategy defines decisions that can distinguish the bank from competitors in the eyes of customers and that allow the bank to beat competitors through cost leadership, superior customer service or other means. Any strategy should take into account the starting point and the customer, competitive, technological and regulatory trends affecting a bank and its markets. It should also equip the bank to manage through financial market and economic cycles, being explicit about the risk exposures desired and how to adjust those exposures throughout the cycle. Strategy should define the attractive markets and whether a bank can develop a strong and sustainable position in those markets so that it can build a few distinctive assets and capabilities that set it apart.
Differentiation comes not from baseline steps such as moving activities online but rather by sculpting features that will induce customers to take out a mortgage or invest their wealth with one bank over its competitors. Making choices about what type of bank to become is a central issue for all banks today. Bain’s analysis of 250 banks globally shows that only 1 in 9 are sustained value creators—we define this group as banks that beat the competition on revenue and earnings growth over the 10-year period, while delivering total shareholder return greater than the cost of capital. Most of the global universal banks extended their footprint so broadly that they now have a long tail of subscale countries or products that don’t yield leadership economics.
The result: The 3-percentage-point return on equity advantage over other banks that global universal banks once enjoyed due to synergies has been reversed, with some global banks posting an ROE disadvantage as large as 3 percentage points, according to Bain analysis. Now, a few global universal banks, such as Royal Bank of Scotland and Deutsche Bank, have started to move away from—or adapt—the model, exiting countries and splitting off large business units. In retail banking, for instance, large national banks’ Net Promoter ScoreSM, a well-established measure of customer loyalty, in some countries still lags behind direct banks, cooperatives and credit unions—institutions that tend to have clear, focused strategies and that explicitly choose not to do certain things so that they can excel at their core offerings. Some leading banks, therefore, are making strategic choices from a set of options that feel radically different from one another, rather than being a variation on a theme. Setting a bank’s ambition at the enterprise level involves articulating a vision that’s both inspiring for employees and specific enough to enable choices as opposed to vague, feel-good aspirations.
The vision can encompass what the mix of businesses and geographies will look like and the desired competitive position. Australia’s finest financial services organization through excelling in the customer experience. Besides a compelling vision, defining the ambition involves choices concerning what balance of risk and return to adopt. This will depend partly on investors’ appetite for risk.
Rabobank, a member-owned cooperative bank in the Netherlands, has defined its risk and return objectives consistent with its members’ appetite. Once the ambition is set, what should the business portfolio mix look like in terms of geographic focus, customer segments, product lines and parts of the value chain? Just as important, what links the businesses and could make the whole worth more than the sum of the parts? This question concerns not only cost and platform sharing or customer overlaps. When weighing whether to keep or add a country or a product line, it makes sense to set a high hurdle. For instance, if you are the No.