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The new market dynamic demands deliberate choices
about where to play and how to win.
By James Hadley, Niels Peder Nielsen, Thomas Olsen and
Gary Turner
James Hadley leads Bain & Companys Strategy practice in Europe, the Middle
East and Africa. He is based in London. Niels Peder Nielsen, Thomas Olsen
and Gary Turner are partners in Bains Financial Services practice, and they are
based, respectively, in Copenhagen, Singapore and Sydney.
Net Promoter ScoreSM is a trademark of Bain & Company, Inc., Fred Reichheld and Satmetrix Systems, Inc.
Copyright 2015 Bain & Company, Inc. All rights reserved.
Then, the 2008 financial crisis caused an abrupt aboutface 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 majority of banks relied
on the same tactics of cost takeout, branch network
pruning and performance improvement over the past
five years, yet the industrys return on equity dropped
by 6 percentage points since before the crisis, and continues to decline (see Figure 1).
Figure 1:
Banking has experienced falling returns and a widening gap between winners and losers
30%
30%
Financial crisis
20
20
10
Pre-crisis
average
16.9%
10
Post-crisis
average
10.6%
10
20
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
Standard
deviation
19932003
20032013
5%
9%
Single company
Industry average
Note: Industry average calculated from all global banks for which data is available through SNL; return on equity calculated as net profit as a percentage of total equity
Source: Bain & Company analysis of SNL data (n=898 North American banks, 210 European banks, 280 Asia-Pacific banks and 33 Latin American banks)
To be sure, many challenges todayincluding low interest rates, high nonperforming loans in some countries and a regulatory backlash in many regionshave
some element of cyclicality. Observers taking an extreme
position could argue that banks in southern Europe
will continue to lag no matter what their strategy is and
that US banks can expect stronger growth once interest
rates rise. Bankers who buy the cyclical explanation
might feel as though they have limited options or should
not make material changes.
Consider that the gap in total shareholder return between the best and worst of the 20 largest banks worldwide has widened from a 5% standard deviation from
the average return between 1993 and 2003 to 9% over
the 20032013 period. 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.
Figure 2:
About 65% of sustained value-creating banks use local or multi-country universal models
Retail/
Commercial
China Merchants
ICICI
Ita
Zachodni WBK
SpareBank
Multi-country universal
48%
JPMorgan Chase
17%
Local retail/commercial
Multi-country retail/commercial
Peoples United
Shanghai Pudong Development
Silicon Valley Bank
Westpac
13%
Pure play
Global universal
ANZ
CIMB
National Bank of Abu Dhabi
Scotiabank
4%
Global retail/commercial
4%
HDFC
TD
9%
0%
Global pure play
4%
Local
Multi-country
0%
Global
Note: Only a few examples of the sustained value creators shown. Sustained value creators are banks with 10-year inflation-adjusted net revenue and earnings before tax (EBT)
growth of more than twice their countrys real GDP, with a minimum of 5.5%; a starting-year EBT margin of more than 2%; and total shareholder return over the period greater
than their cost of capital.
Sources: Bain & Company analysis of CapIQ and bank financial reports
Ambition
Where to play
How to win
Geographies to
compete in
Attractive customer segments
to target and retain
Product lines to offer and prioritize for cross-selling
Parts of the value chain to participate in
Structured
finance
High
Invest to increase
market share
Small and
medium
business
Competitive
position Medium
ability
to win
Micro
business
Agricultural
financing
Low
Low
Expand tactically with
low effort, or exit
Global
cash
management
Medium
Asset
management
Wholesale
banking
Securities
trading
300
High
Risk-adjusted
income ($ millions)
Business attractiveness
view based on an assessment of each businesss attractiveness, using metrics such as return on capital and segment growth, and the banks ability to win, using metrics
such as relative market share and relative customer
loyalty scores (see Figure 4). Then you can set a strategy
for each business and allocate resources appropriately.
Distinctive how-to-win models in banking include product innovation (as pursued by China Merchants Bank),
efficiency (Santander) and repeatable mergers and acqui-
Figure 5:
Deciding how to win requires identifying which few capabilities matter most to the business
Management
capabilities
Operating
capabilities
Portfolio and
capital management
Risk selection
and pricing
Go-to-market
(service/selling)
Customer centricity
and proposition
Asset and
capital base
Distribution points
Brand
Customer
relationships
Proprietary
assets
Balance sheet
Operations/back office
Distribution/customer experience
Figure 6: Santanders efficiency model hinges on several key capabilities and assets
Management
capabilities
Operating
capabilities
Portfolio and
capital management
Risk selection
and pricing
Asset and
capital base
Proprietary
assets
Localized geographic
units and marketing, with
global support on overarching functions such as
risk and IT
Go-to-market
(service/selling)
Customer centricity
and proposition
Focused, sophisticated
front-line tools and
sales culture
Standardized, efficient
processes and best-in-class
IT systems result in
lower costs
Balance sheet
Distribution
Brand
Customer
relationships
Maintains leadership
position in each
geographic market
Operations/back office
Distribution/customer experience
These changes demand more from leaders at the corporate center. For example, they will need to develop a
better understanding of the real profitability of their
businesses, adjusted for risk and capital requirements.
While banks frequently used risk-adjusted return on
capital measures in the 1990s, many moved in the
early 2000s to a focus on operating profit, then moved
to revenue or even volume of assets, which encouraged
indiscriminate growth. Some banks only reestablished
a focus on return on capital measures after the financial crisis. Most banks could also stand to improve
their policies on transfer pricing, capital allocation and
incentives for executives and staff.
A great strategy will stall without effective implementation, of course, and banks face substantial challenges
here as well. They have to deal with interlinked flows
of capital and legacy IT systems that create interconnections and make it tough to unwind particular businesses.
Yet with market dynamics expanding the gap between
winners and losers, banks have nowhere left to hide.
The proliferation of digital attackers, combined with
innovations such as peer-to-peer lending and international payments solutions, are accelerating the pace of
competitive change. Those banks that move quickly to
define focused and distinctive strategic paths and priorities will be able to control their destiny. Those that
hesitate or hope for the cycle to swing in their favor risk
running out of time and being caught wrong-footed as
the market evolves.
Asia-Pacic:
Europe,
Middle East
and Africa: