UK: Positioning For a New Financial Landscape - June 2010

Foreword

The future of the global financial services industry remains uncertain. While the worst of the financial crisis and economic downturn appears to be past, the competitive landscape remains in flux and the debate about regulatory change continues, with few of the final details agreed upon.

What is certain is that the global financial services industry is experiencing a period of transition, leaving behind many of the practices and products of the pre-crisis era, and moving towards a new financial landscape. However, there are questions as to what preparations institutions are making to position themselves for success in this new landscape.

To shed some light on these questions, Deloitte conducted a survey of over 200 financial services executives from around the world, the results of which are presented in this report. These executives revealed the impact of the crisis – the relationships damaged, the performance curtailed, and the strategies disrupted – and highlighted their future focus around customers and products, strategy and operations, risk and regulation, capital and liquidity, and talent and technology.

Yogi Berra

U.S. Baseball Legend

As this industry transition continues, Deloitte's Global Financial Services Industry network is committed to providing continued thought leadership, surveys and studies on the issues most important to global financial institutions. Deloitte's aim is to help guide clients through these challenging times and provide them with insights useful in preparing for a new financial landscape.

I hope you find this report of interest.

Regards,

Jack Ribeiro

Managing Partner, Global Financial Services Industry

Deloitte Touche Tohmatsu

The damage done

After every catastrophe there is a strong desire to rebuild bigger and better than before. However, there is also an acknowledgment that the first task is to clear away the rubble and assess the damage, before any reconstruction can begin.

The catastrophe of the global financial crisis and economic downturn initially threw many institutions into survival mode. Institutions scrambled to access liquidity, de-risk their assets, and slash operating costs. Carefully constructed strategies and operational activities were thrown into chaos, and executives recoiled at the thought of the damage done to relationships with customers, employees, shareholders, regulators, rating agencies and, of course, the general public.

However, as the dust settles and the rubble is cleared, 89 percent of survey respondents indicate that they have survived the crisis and economic downturn as well as, or better than, expected [figure 1].

As a result, their focus is continuing to shift from survival mode to recovery mode [figure 2]. However, there remains a significant element of caution within this shift. The industry, and the global economy, is still being sheltered by government support in various forms of guarantee, both implicit and explicit, and other forms of protection. In addition, the continued low-interest rate environment means it is difficult to tell how durable the recovery has become, and how the global economy would fare if that low-rate environment were to change.

While over half of survey respondents indicated that they were optimistic about the prospects for their industry over the coming year, the remaining 49 percent point to the uncertainty that exists within the industry and the broader economy [figure 3].

Relationships

When respondents considered the damage that the financial crisis and economic downturn inflicted on their business relationships, there was a difference between the various sectors [figure 4].

The banks led the sectors most concerned about the damage done to their relationship with the general public. Considering that media attention about the crisis has been heavily focused on the banks – a term loosely used by the media to describe everything from mortgage originators to 'Wall Street' traders and hedge fund managers – it is not surprising that public perception is high on the banks' list.

Respondents from the investment management industry led the sectors in worries about damage to customer relationships. While not publically painted as villains quite to the same extent as the banks, there is no doubt that there was damage done each time a customer opened a shrinking investment statement during the period of the crisis.

Surprisingly, the insurance industry respondents led the votes for damage done to employee relations. However, this might be explained by the inclusion of producers and agents in their perception of the broad term 'employees'. As the individuals caught in the turmoil between customers and the insurance companies, it is perhaps not surprising that respondents felt that these producer and agent relationships had been damaged.

Performance

Respondents indicated that the greatest damage done to the performance aspects of their business, as a result of the financial crisis and economic downturn, was that it left them with less ability to generate top line revenue [figure 5]. This response reflects the shrinking or disappearance of a wide range of revenue generating activity. Clearly as mortgage originations ground to a halt there was a corresponding drop in the fees banks expected to make from those transitions. In addition, the drop in demand for policies to insure those houses also impacted the insurance industry.

Furthermore, the freeze in structured products that packaged many of those mortgages into asset-backed securities also had an impact on the fees generated by the industry. Banking respondents also indicated an additional area of performance damage, leading the sector votes on the issue of weakened balance sheets [figure 6].

This is recognition of the damage done by the historic drop in equity prices at many institutions, along with the significant write-down banks were required to make against many assets that had a mortgage element to them.

Strategy

The final area of damage indicated by survey participants was in relation to disrupted strategic goals. The majority of respondents indicated that their plans to expand into other sectors had to be put on hold as a result of the crisis, with the second and third ranked areas of damage being related to new product development and the sustainability of business models [figure 7]

Performing a sector analysis of those second and third ranked answers reveals a difference in response between the banks and other sectors. While insurance, securities and investment management respondents rated their ability to develop new products as having been more damaged than their business model sustainability, the banks voted the opposite, highlighting doubts about the durability of existing bank business models [figure 8].

This is a theme that reveals itself across the entire survey, where banking respondents recognize the need to rethink their business models, particularly as we enter a new financial landscape where cost pressures and the potential for revenue generation have changed significantly.

The silver lining

Of course, every crisis generates not only danger but also opportunity, and so the survey asked respondents to identify what positive aspects may have resulted from the financial crisis and economic downturn. Many institutions have used the crisis as an opportunity to rationalize their business, by controlling costs, trimming talent and cutting customers who have been persistently unprofitable.

Interestingly, respondents based in the European, Middle East and Africa region (EMEA) indicated that a focus on cost reduction was the most positive outcome, while the majority of respondents from North America voted for the opportunity to strengthen their institution's brand [figure 9]. Perhaps this might be explained by the disproportionate number of institutions in North America that failed or were acquired during the crisis, leaving a thinner competitive landscape in which the survivors can further establish their brand.

Certainly the response around competitors leaving the market was dominant in the banking and securities sectors [figure 10], with insurance respondents leading the sector vote when it came to the opportunity to acquire other businesses [figure 11].

This is likely to reflect the trend for insurance consolidation that pre-dated the financial crisis and economic downturn, now accelerated by increased capital requirements and the opportunity to make acquisitions at an attractive price.

Against this backdrop of damaged relationships, performance and strategy – and the opportunity to cut costs, strengthen brands and make acquisitions – what should institutions be focusing on as they position for the new financial landscape? These intentions are revealed in the rest of the survey data, reviewed in the next section.

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