Global Financial Services Sector

Your humble blogger has become accustomed to speaking about the banking industry as one under stress.  Reputation and trust are at the heart of problems as politicians, regulators and the general populace tend to blame the economic crisis largely on greedy bankers.  Imagine my reaction as I get ready to land in Singapore, and am catching up on the latest issue of the Straits Times, to read that “Banks are No.1 in survey of five industries’ reputation.”

Trust in banks may have taken a bit hit around the world, but banking in Singapore still enjoys a healthy reputation, according to this survey.  People here rated the retail banking sector higher than life insurance, general insurance, telecommunications and petroleum.  DBS is the top retail bank, just above OCBC.  Citibank came in third, followed by Standard Chartered and UOB.  According to the survey, top drivers of corporate reputation in retail banking are providing good customer service, being transparent to customer and regularly engaging the customer.

So there you have it.  If you’re going to be a banker, this seems the place to be….or conversely, perhaps the best banker are here?

….just visit Hong Kong.  I hadn’t been here in a few years and so had forgotten what a fabulous city it is.  Culturally rich, full of life and lights and probably one of the top most vibrant cities in the world, along with New York, and maybe Tokyo, but its so much more chaotic here!    Business is good in this part of the world.  I met with several banks in my short few days and they are practically brimming with optimism, happy to be on this side of the world.  Aside from the relative health of the economy there’s something about being thousands of miles away from head office (in the case of the US or European owned banks).  It gives people a sense of freedom, nimbleness and almost a ‘laboratory’ feel to their decision-making.  ”Use us”, one of the banks executives said, meaning that he is capable of making quick decisions about the use of technology, services and generally trying new ideas.    I may have to take him up on that…

I also met with old friends who I used to work with who have started up new businesses in media and technology and the like.  there’s an entepreneurial spirit that’s a bit infectious.

On to Singapore…

It’s earnings season for Q1 ’13 and so far Citi is the big winner in FS.  Yes, go head and read that over again, I’ll wait.

Citi reported first quarter eps for $1.23, net income of $3.8B on revenues of $20.5B.  This compared to net income of $2.9B on revenues of $19.4B for first quarter of 2012.    If you peel it back a bit, however, you see that the success comes on the back of the Investment Banking unit, which grew revenues 84%.  This is a result of some counter cyclical hiring of a bunch of ‘rainmakers’ in the investment bank, when others where shedding theirs.  It would appear then that a lot of this revenue comes at the expense of others in the market, as opposed to a big increase in activity.  In the meantime, the consumer businesses have not fared so well, nor Transaction Services, their historic stronghold.  Consumer banking and cards revenues are down 1% in North America.  Consumer revenues are up in Latin America and EMEA but down in Asia (really?  based on spread compression and increased regulatory pressure, they say).   Transaction Services are down 4%, including 11% in Asia.   Most notably, I see a lot of “expenses were up yty” in their report for Transaction Services and Consumer Banking, based on volumes.

So nice to see a good headline, but there’s no doubt in my mind that there is still a headwind in the banking sector, including for Citi.

I was with a trusted client recently…you get the best ideas from your best clients, eh?  This fellow said that he thought  it was time to go digital – at meetings.  He pointed out that while there is a lot of attention to paperless offices, paperless banks, going paperless, digitization and the like, (the only paperless office in my location is the men’s room) he said he thought we should look at how meetings are conducted.  People spend more time in meetings than, well, than they do with their families…sad, but true?  They show up with their notebooks, or blank pads, or bits of paper, or maybe, just maybe they bring their laptop or iPad.  Those who take notes on paper have then to think about what they do with their notes.  Should they distribute them?  make sure that actions are agreed?    Why not manage meetings with technology in the proverbial cloud.  We’re all heading toward BYOD (wish my firm would hurry up too), so why not just let everyone take notes on their device and then they can be shared electronically.

Anyway, interesting idea.   Down with filing cabinets!

While bankers are doing their best to deal with significant capital adequacy requirement, insurers are largely dodging these extra charges.  The biggest banks – called Systemically Important Financial Instituations, or SIFIs – are required to put aside additional capital in order to be in a position to have enough cash under the mattress to avoid a government bailout should another downturn like 2008 occur.  The International Association of Insurance Supervisors (IAIS, of course) will make a decision about whether ther are “systemically important insurers” as well.  If so, you could imagine AXA, Allianz, Legal & General, MetLife, and perhaps a few others, to be considered.

This American Banker Technology article “Wells Exec Guards Against Self-Service as Disservice” brought back memories with its references to the impersonal nature of machines and self-service. All the banks are talking about “customer engagement” and “customer experience” as a top priority – and that’s admirable. The articles states: “Jonathan Velline, an executive vice president at Wells Fargo, likes to use the word engage in discussing the role of the branch. As banks modernize their branches and provide more self-service options such as tablets and video-equipped kiosks, they have to guard against losing the human touch, he says.” I did kind of chuckle when I read that.

 When I think about innovation and banking, the first thing I can think of is the launch of the ATM machine.  It was originally called the “Bankograph” and an experimental one was installed in New York City in 1961 by the City Bank of New York (Citibank) but removed after 6 months due to the “lack of customer acceptance”.

The 70s changed everything. I had the privilege of meeting one of the pioneers of the ATM machine, Walter Wriston, former chairman and CEO of Citibank (1967-1984) while working at Citigroup a few years ago.  He expressed to me that he met with some opposition early on around the security aspects of ATM machines, as well as the “soul-lessness of machines” in general, not to mentioned the proposed $100 million investment price tag (which ended up closer to $160 million and the largest capital expenditure in Citibank history).

So what’s my point?  Clearly, Wriston’s opposition was made to look pretty clueless by the consumer banking population which quickly and fairly seamlessly embraced the convenience of the machine that spits out money and accepts deposits 24/7- “without a soul”.  What is really fascinating about the ATM integration is that after the technology had earned the trust of once highly skeptical customers, an amazing transformation began to take place: Face-to-face business became face-to-interface, and it changed the way people consumed. Technology began to drive human behavior.

Not much happened on the customer facing front since the ATM until online banking emerged in the late 90s.  Having worked at Chase in online banking at that time, I do recall the major concern against using online banking was the fear of fraud – and that fear remains through today in terms of hacking – but the gap narrows as the younger generations enter into the fold and security measures evolve.

Fast forward one decade and mobile banking becomes the next level of  innovation with its own set of  security risks.  That said, Forrester predicts “….the number of US mobile banking users to double in the next five years and reach 108 million by 2017 — 46% of US bank account holders.”   And specifically, “Everyday banking relationships are moving to mobile. Consumers are progressing from simply checking their account balances or locating an ATM to making bill payments or transferring money to other accounts on their mobile phones. As that happens, mobile banking is displacing use of other channels like branches and online banking.”  So much for the human touch.

Unlike with the ATM – technology is no longer driving us – the consumer is extremely comfortable with technology and is now in the driver’s seat and demanding advanced and convenient methods of interaction from their financial institutions.  Human behavior is now driving technology and how business is done in many industries – including financial services.

So, with that in mind, is self-service really disservice?  Or, is assuming what the customer wants really the disservice?

I bring to your attention Warren Buffet’s latest letter to shareholders, published recently.  If you’re new to these missives, you might want to troll through some of those from past years, because for many they are an eagerly awaited observation on topics as varied as the global economy, the insurance industry, and tips on shopping.  I for one always sit down and read his letter when it comes out (who reads many ‘letters to shareholders’, eh?)  because it is not only insightful, but a fun read.  I pass on the link to you all, below, and bring to your attention particularly the section of his letter discussing Berkshire’s Insurance businesses.   As usual, and with his homespun manner, he does an excellent job explaining some of the key mechanics of the industry, the importance of “float” and the investment side of the business, as the operating ratios become more difficult to manager.  For those looking for a nice primer on what makes insurance companies perform, don’t miss those pages.

Enjoy:

http://www.berkshirehathaway.com/letters/2012ltr.pdf

I’ve been thinking recently about how big companies manage their supplier relationships.  Many of them have “strategic vendor” programs.  As a supplier, I know that often these are viewed cynically as either a gate-keeping mechanism or a straightforward effort to consolidate contracts for purposes of negotiating discounts.  So I started asking around about what makes a good strategic vendor management program and why.  If you believe that such a program can provide closer and more productive economic relationships between client and supplier, then I can find at least 4 variables that effect a productive effort:  1) structure:  is the program situated in Procurement/Sourcing?  IT (for IT vendors)?  Another Corporate organizational vehicle?  2) Sponsorship – does the program enjoy ACTIVE and engaged sponsorship from senior management, 3) people – are the people in the vendor management team contracts specialist or are they relationship specialists, and 4) Is sharing encouraged; sharing of business plans and in particular encouraged sharing between strategic vendors, for the good of the client.   

Barclays’ tone-setter the other day is worth commenting on.   The world over, banks are wearing the blame for the economic crisis, fairly or unfairly (some of both, for sure).  ”Banks are evil” seems to be rule #1 for many citizens and for all politicians.  With this kind of respect in the marketplace, new guy Antony Jenkins has decided to come out.  Not swinging, but with a contrite admission that bankers need to improve their game when it comes “doing well financially and behaving well.”  Cynics will and have commented that of course he would say that.  Optimists will applaud candor and concrete plans to improve on both….a plan to be seen as an ethically responsible group as well as a financially healthy institution was laid out with enough detail to at least get a clap.   7.8% ROE is about average in the industry today, and terrifying, when one realizes it’s below cost of capital.  His 2015 target is 11.5%, not a return to the golden year, but a more proper result to report.  Cost/income of 64% is also not “worst of breed” (have a look at HSBC for lack of progress in that regard…?), but a goal in the mid-50′s is at least the right target.  I guess I find myself rooting for Jenkins, and hoping he succeeds.  

Okay, so the saying is actually “it’s the economy, stupid,” but in actuality until interest rates start to recover a bit, the banking sector is going to continue to struggle.  The first earnings announcements came out from the sector – Wells Fargo sufferd a sharper than expected decline in its net interest margin.  Until the Fed backs off of it’s ultra-low interest rate policy, lenders are going to suffer.  Deposits are actually well up, but banks are finding it hard to make profits from the money.  Let’s keep an eye out for this coming week’s announcements from JPMC, Citigroup and Bank of America Merrill Lynch.