Leading financial services company, Ernst and Young has said sovereign debt crisis has worsened the already precarious position of many banks while their business models are evolving in response to the last crisis, as they're not doing so fast enough.The cost base of many banks according to E&Y is no longer sustainable, while incremental changes will not be enough to restore profitability, even as the global professional services group said South African banks face very similar issues to their global peers.'Funding is likely to remain extremely tight in the short term. In the medium term, we'll see business and funding models change as banks begin to adapt. Banks will align their businesses to core areas of expertise and dispose off non core assets; resources will be diverted from mature to growth markets to increase revenues. More will try to focus on capital-lite businesses like wealth management and transaction banking,' E&Y lead Financial Services Director Emilio Pera says.Given the challenges being faced by the banks, he adds, incremental changes to save 5-10% of costs are not likely to be enough.'A fundamental shift in the business model will be needed e.g. rationalising product sets, leveraging technology to redesign the operating models, processes and delivery channels. For some, it will also mean divesting non-core assets or - if banks can afford it and have the appetite in this market - bulking up to deliver scale. The challenge for banks most affected will be to make these changes without destroying the positive elements of their corporate culture.'Pera forecasts that competition in the sector will intensify globally - and from some unexpected sources.'Credit growth in emerging markets should be stronger and banks with an emerging markets exposure will try to compensate for slow growth in developed markets. Competition for higher quality asset pools will be stiffer. Banks will continue to chase deposit growth, particularly from stable market segments to ensure compliance with NSFR and LCR ratios mandated by Basel III, increasing competition on the liability side,' Pera opines.Irrespective of specific requirements, he notes, implementing regulatory changes will continue to be a massive drain on resources.'Responding to regulatory guidelines will continue to remain topmost in management agenda. Such tactical responses will continue to consume additional management and staff time. Strategic decisions are being delayed as banks wait for regulations to be finalized to understand the impact of them on their businesses. Investors remain wary of the sector given the combination of regulatory and economic uncertainty,' notes Pera.He adds that the ability to invest in and exploit technology will be crucial for growing revenues, complying with regulations and cutting costs.'Banks will continue to invest in improving their electronic payment platforms and drive innovation, driven by efficiency as well as a defensive measure in response to threats from companies like Paypal, Square and Google. Ability to invest in technology will become a growth enabler and differentiator as banks look to exploit new channels and defend existing payments revenues.'Systems and processes will need to evolve to track, manage and mine data across the organisation e.g. for risk management, capital optimisation, compliance (e.g. AML and client on-boarding for new channels.
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