• Peter Rothwell, Partner |
  • Nicholas Mead, Partner |
3 min read

In a more constrained and volatile environment, pressure is on banks to adopt a viable and sustainable business model in the face of constant change – agility is the key to achieve this.

Rapid change results in challenging trading

For investors, analysts and keen observers, recent results announcements from the major UK banks already provided a lot to digest, before they even reached for their Halloween candy!

More or less across the board there are signs that the boost in net interest margin from higher rates is coming to an end. Margins are being squeezed once more in the face of an expected plateau in interest rates combined with a political and market pressure to pass the benefit of historic rate rises on to depositors. At the same time there are question marks as to how significant regulatory changes, such as Basel 3.1 and – in the UK – consumer duty, will affect banks’ ability to generate long-term franchise value.

And so whilst the sharp rise in rates we experienced over the past year may have provided some temporary relief to banks' profitability, it is clear there is some way to go before investors are convinced the UK and EU banks have found a solution in achieving viable, sustainable long term returns – as the Price / Book ratio starkly illustrates (see below):

P/B ratios from selected banks (European banks incl. Deutsche Bank, BNP Paribas, UBS and Santander / UK banks incl. HSBC, Lloyds Bank, Barclays, Standard Chartered, NatWest and Virgin Money) taken from https://www.macrotrends.net/

Achieving a sustainable business model: change agility in a changing world

But the question is how to go about this? Understandably there is a significant focus on cost – both take-out and rationalisation. But in our mind this is only part of the solution, and is focused more on managing the symptoms rather than addressing the underlying causes.

We see two key underlying causes:

1. Banks are more constrained - We have seen a fundamental increase in the level of capital and liquidity banks have been required to hold over the last 10 years and is only set to continue with Basel 3.1. Such actions have constrained the availability of financial resources and challenged firms to find a more efficient/optimal allocation of resources; and

2. Banks operate in a more volatile, unpredictable and rapidly changing macro-economic and market environment

In our view, the only effective response to these challenges can be summed up in one word - agility. This has 3 core components:

  • Operational agility: comprises developing tools and processes that optimise the allocation of financial resources and drive ROTE growth, for example, by improving the accuracy of planning and forecasting and management of key ratios;

  • Structural agility: comprises having the right Legal Entity, booking and risk transfer model in place to manage financial resources effectively and optimally;

  • Strategic agility: comprises having the adequate balance sheet agility/velocity aligned with the respective TOM and the flexibility to seize opportunities in M&A and/or divestments.

The present imperative

If the bank failures and profound dislocations we have seen in the last year have taught us anything, it's that finding the pathway to a viable, sustainable business model is as much about franchise protections as value creation. For investors, regulators and the public at large – the creation of a credible long-term equity story is today’s imperative, not tomorrow’s aspiration.

Please get in touch with us to find out more about our Change Agility Framework and how we can support you.