Global Financial Services Sector

There are a lot of banks happy to have 2011 behind them.  So far Citi is way down in revenue, BofA returned to profit on the back of improved NPL and got some reasonable press, Goldman was down, BNY Mellon down, Morgan Stanley beat expectations only by cutting costs (limiting cash bonus to $125k!), Northern Trust profit is down 17%, State Street was up thanks to a favorable comparison to last year.

Summary – revenue is still the problem.  M&A is slow, Investment Banking overall is down, Trading revenues are down.  Frankly, the banks with little to no presence in capital markets and Ibanking did far better.  USBancorp is one, for example, though their CEO did also warn that lending looks to be slowing down in the current quarter.

When asked if the industry slowdown is temporary of structural, the CFO said “It’s a very difficult question to answer.”    (translation:  I have no clue!).

It’s certainly going to be another year of massive cost takout.  Add Citi’s new $3.5B target to HSBCs already announced $3.5B target, Morgan Stanley $1.5B, etc. and you get the idea.

I read a good blog post by Chris Skinner the other day  (http://thefinanser.co.uk/fsclub/2012/01/horizontal-versus-vertical-myth-and-reality.html).  He writes a lot of good posts, but this one struck home as it followed a recent discussion.    The premise is simple – when serving the FS industry, it helps to know something about it.  Of course if you’re vendor of pencils, or even commodity technology, then its admittedly less important to have deep industry knowledge as you strive to achieve relevance with a bank or an insurer.  But if you and your company aspire to be a “solutions provider” then you simply can’t go to market any other way.  The financial services industr(ies) are simply too complex and rife with their own language (try talking about “stocks and bonds” to a banker, rather than “equities and fixed income”) to be able to provide high value services if you don’t understand them.   You also need to adopt an “outside in” mentality, ie understand the market and the client and then come back inside your own shop to see if and how you can help.  This is far more empathetic to the client (and productive) than looking at your product line first and then heading out to sell.   For illustration of complexity, see Skinner’s rubik’s cube above.

After all, as the old drill bit supplier used to say, we are not really selling drill bits, we’re selling holes!

It seems pretty clear that one of the effects – intended or otherwise – of all this regulation will be that banks will get smaller.  Higher capital requirements and difficulties raising money (not to mention the difficulties in making money) will surely lead to smaller balance sheets…certainly in Europe at the least.    And those banks deemed the largest have the largest capital requirements.  Regulators and politicians alike are certainly nervous about banks that have assets 3-4x their country’s GDP.  Maybe that’s indeed worth fussing over.

Meanwhile, the “shadow banking” systems has recovered to its pre-crisis peak, rising to $60tn in assets in 2010.  Good article in the FT this morning about it (http://www.ft.com/intl/cms/s/0/f63bea6c-2d5c-11e1-b985-00144feabdc0.html#axzz1hvivn11X).  The shadow banking system is unregulated, and even undefined, though it seems to include money market funds, hedge funds, private equity funds, at the least.   So what’s going on is that some of the traditional banking market is being squeezed and pushed into the shadow market.  Examples – some proprietary trading (‘prop’ trading) that’s no longer allowed in the US under the Volcker rule has now morphed into new hedge funds.   Some european banks are doing deals with insurers and pension funds to to obtain new financing and banks are striking deals with private equity and hedge funds to set up ‘regulatory capital relief funds’ in an effort to preserve their own capital.   This is particularly important for these eurozone banks now that  they appear locked out of the public funding markets (though yesterday’s successful bond issuance in Italy may be a sign of hope?).

Clearly the shadow banking systems is a stress release valve for the system overall.  It’s deemed now to be as much as 25-30% of the whole system…and it’s largely unregulated.  Maybe that’s okay for now…?

Okay, so part of the reason I chose the title for this entry is so I could use this cartoon.  But the other reason is because everybody keeps doing it – kicking the can further down the road on important policy and economic issues, avoiding the tough actions required to bring health back to our financial system.  ”Our” by the way, is not meant to mean the US financial system.  The world is a far smaller place than it ever has been before, but of course politics are forever domestic.

I teach a class to 11 year olds when I have spare time, and it’s no surprise how wise they are.  I am teaching about the Global Marketplace, but they keep asking me tough questions like “why don’t they just fix it” when we talk about how messy things are in Europe, or how poor people are in some parts of the world.  The eurozone has been unable to take drastic action about those members who are clearly insolvent, and are unable to grow their monetary union.  China persists with a weak currency, supporting a growth model, and the US has postponed structural reforms necessary to restore growth.  Politics, elections, intransigence.

It’s annoying, though, when a blogger just writes and complains without knowing what to do about it.  Well, in the meantime, let’s kick the can through the holiday season and have another go in January.  Best wishes to all.

I had the chance to interview Dave Potterton last week (https://www.brainshark.com/brainshark/brainshark.net/portal/title.aspx?pid=zCrz9x4ioz0z0).  Dave is the head of Financial Services research for IDC and has a wealth of experience in the industry.  The intersection of financial services and technology is of course the busiest intersection in the world, and it was fun to get Dave to expound on his views for 2012.   He offers ten points that are quite pertinent, in my view.  Here is the list, but have a listen to the discussion when you have the time.

Before closing out the year, the Centers for Medicare and Medicaid Services published a final rule on health insurers’ “medical loss ratios” which establishes “rebates” (i.e. penalties) for commercial health carriers that have admin expenses exceeding 15% – 20% of their paid costs for clinical care.  The percentage is based on the size of the payer.

While the rule does not apply to Property & Casualty companies, the benchmark has clearly been established.  As you wrap up the year and tally up your costs, you’ll want to pay particular attention to this ratio.  If you are paying workers’ compensation or auto medical claims, how do you compare?  Are your allocated and unallocated expenses totaling more than 15% – 20% of your loss costs?  If so, your goals for 2012 should include a plan to get your expenses within this range.

Outsourcing is one approach that has been gaining in popularity.  More and more companies are reaping benefits from turning their labor intensive back office processes and customer contact centers over to experts that have the experience and tools in place to handle them more accurately and efficiently, even in domestic locations.

http://www.federalregister.gov/articles/2011/12/07/2011-31289/medical-loss-ratio-requirements-under-the-patient-protection-and-affordable-care-act

Anybody who works in or near the banking industry knows it, but there’s an interesting article in today’s FT (http://www.ft.com/intl/cms/s/0/158171f6-218e-11e1-a19f-00144feabdc0.html#axzz1g37cuTE6) about the flood of regulatory requirements in the industry and the issues that financial institutions face in keeping up.

Get this – regulators around the world have announced 14,215 changes in the last 12 months, a 16% increase over the prior brutal year.  These rules range from things like Basel III capital reforms to individual US states’ requirements.  Compliance departments are drowning.  Additional ‘no surprise’ fact – over half of this activity is in the US and Canada.  Dodd-Frank must be killing a lot of trees.  Hmmm, I think I can help with that problem…

When I first joined Xerox, I stumbled upon this Businessweek article from 1975 entitled, “Office of the Future”.  It predicts the paperless office. My favorite quote comes from the head of the (then) newly formed think-tank in Palo Alto known as PARC, George E. Pake, who says “… that in 1995 his office will be completely different; there will be a TV-display terminal with keyboard sitting on his desk. “I’ll be able to call up documents from my files on the screen, or by pressing a button,” he says. “I can get my mail or any messages. I don’t know how much hard copy [printed paper] I’ll want in this world.”

Full of quotes like this, the article may seem comical in retrospect – however, it’s worth a read.  Here’s an ironic one given the current global economic climate “…the current recession has brought a real awareness by companies that they have to identify and control office costs and improve productivity.” A Quantum Science Corp. survey showed that while the recession had forced a cut in overall office spending, it was also responsible for increasing text-editing typewriter installations. Nearly one-fifth of all offices surveyed, and 39% of the larger ones, either planned or had recently added automatic typewriters.”

Fast forward 35+ years and we’ve got that “TV-display terminal” (better know as a computer screen) sitting on our desks – but we still have a whole lot of paper sitting there, too. What happened? Maybe the future of the document is not what we first thought.

Interestingly enough, Xerox still talks about documents and the future, but in a whole different way.  Instead of focusing on the paper – we focus on the document and explain how people use it as a strategic business tool.  John Kelly, Executive Vice President, Major Account Development, here at Xerox wrote a book recently, called “Between the Lines“, on this exact topic.  You can read the ebook on your Kindle or iPad, or print it as a pdf if you’re still a “paper person”. We are digital vs. physical neutral on this one.  But do have a look, especially at the first chapter. As we predicted in the 70s — and we’ve demonstrated in the last decade – we’re moving with our clients in the digital direction. Yet we still recognize the role the document plays in our lives and the value it delivers to business regardless of its physical form.

John’s book is full of real world examples about how companies use documents to reduce costs, improve investment returns, and a whole host of other business advantages you might not expect.  My favorite example focuses on futuristic technology like erasable (reusable) paper – very James Bond – and very real.

Here’s your chance to get a glimpse at other cool technology that we think will become commonplace over the next decade and beyond.

I hope you will download it. It reads quickly and may get you to look at the lowly document in a whole new light.

Well they call it the GFC (global financial crisis).  Leave it to folks down here to give it an acronym, tho I’m not sure they created it.  Somehow it seems the GFC has largely missed Australia.  With GDP growth at about 3%, unemployment at 5%, thinks aren’t bad at all for now.  The banks here are regulated well.  Sure does make a difference – lots like Canada, and the industry is consolidated the same way, with 4 big banks dominating the market, and all earning about 17% ROE along the way (what an american and european bank wouldn’t pay for that that kind of nostalgic ROE, eh?).  Oh, and cost/income ratios are all in the low 40s, though they claim they’re shooting to get under 40.

Nonetheless, when I casually talk to top bankers about how lucky they are and how the focus on cost is so apparent up north, they are quick to stand me up and claim that they are just as focussed on cost…due to worries (not ‘no worries’) about slackening revenue growth.  If revs are slow, then efficiency is the game.  Guess it’s the case all over.  Not only that, the Aussies are incredibly innovative.  Enjoying a skilled and experienced workforce, and a smallish economy (about 20m people), new ideas and technologies are taken up here like a match to paper.  Have a look at what the banks are doing with mobile payments and social media, for example.  Here’s some video evidence, courtesy Chris Skinner (http://thefinanser.co.uk/fsclub/2011/10/the-best-mobile-financial-videos-on-the-web.html)

One of the Aussies, ANZ Bank have broad aspirations overseas, and are investing heaving in their footprint in Asia.  The others have not such aspirations.  Looking forward to seeing how that plays out.

p.s.  the coffee down here is a ton better than in the US.  so is the beer.  come to think of it, the Aussies do all their liquids pretty well.

Any fan of the History Channel knows that, when it comes to forecasts and predictions, 2012 expects to be an extraordinary year.  Whether the Mayan calendar really predicts the “end of the world” on 12/21/12, or whether some of Nostradamus “dooms day” prognostications come true, we think the financial services industry will experience some “transformative events” in 2012 – but more related to technology trends than prophesy.

Many in the financial services industry wonder if the uncertainty experienced during the last 3+ years will continue.  I sure hope not.  Analyst firm IDC has sized technology spend patterns for years and they believe that business growth and transformation lie ahead.

When I think of thought leadership in the analyst community, specifically around financial services, IDC’s Vice President of Research, David Potterton comes to mind first.  To highlight IDC’s annual forecasts for 2012, we’ve asked David to share predictions he believes will have the greatest impact on the financial services industry during an interactive Web chat on December 8 at 11 am ET.

In his comments, David will drill down into those issues where technology stands to impact financial services most profoundly, including:

• The impact of increasing regulation on the industry
• How big data will provide new opportunity to grow revenue
• Why client demand for a seamless “experience” and customized, real-time products and communications will redefine customer interactions
• How everyone from IT to marketing must learn to analyze and innovate continually to remain relevant

David will also look at the year ahead to identify which trends and technologies will drive success in 2012 and beyond. He believes financial services firms must focus on a few key strategies to remain relevant with customers, increase profitability, and stay ahead of the competition. Join us live and get ahead of the curve for your 2012 planning and implementation projects.