Banks adopt more disciplined strategy

PETALING JAYA: The increasingly challenging and competitive environment has pushed global banks to adopt a more disciplined strategy to drive business growth, a new research by Bain & Co found.

In its recently released research report entitled “The Return of Corporate Strategy in Banking”, the international management consulting firm said banks globally would now need to define a strategic path by making deliberate choices, as they approach what is seen as the “last call” to create a robust competitive advantage for long-term survival.

“A central issue for all banks today is deciding what kind of bank they want to be,” said Thomas Olsen, a partner in Bain’s Financial Services Practice and co-author of the report.

“For years, macroeconomic trends enabled global banks to extend their footprint without much regard for the potential drawbacks of complexity.

“Now, many banks are reassessing the value of size and scope in an environment where the most successful institutions are actually making explicit decisions not to do certain things so they can excel at their core offerings,” he added.

According to Bain, the times demand that banks re-learn strategy by throwing out the old strategic banking playbook, which took a resource-led approach to the portfolio, and adopting a more effective approach – one that defines decisions that can distinguish the bank in the eyes of consumers and allow the bank to beat competitors through cost leadership, superior customer service or other means.

On that note, it said an effective strategy would involve making deliberate choices in three areas – what’s its ambition, where it should play and how it should win.

“Setting a bank’s ambition at the enterprise level involves articulating a vision that’s both inspiring for employees and specific enough to enable choices as opposed to vague, feel-good aspirations,” Bain’s report explained.

It added that banks should determine how the business portfolio mix would look in terms of geographic focus, customer segments, product lines and parts of the value chain.

And while some banks would jump right to tactical steps after deciding where to play, Bain said most sustained value creators, by contrast, would spend time identifying and investing in the few capabilities essential to realising the strategy, while being “good enough” where it’s sufficient.

Bain noted that in a new era of banking, whereby long-term implications of digitalisation, disruptive competitors, sustained low growth, and increased regulations are coming into play, winners are quickly pulling ahead of the losers, with the gap in total shareholder return between the best and worst of the 20 largest banks worldwide widening from a 5% standard deviation from the average return between 1993 and 2003 to 9% over the 2003-2013 period.

“With market dynamics expanding the gap between winners and losers, banks have nowhere to hide,” said Olsen.

“The need to make strategic choices for long-term growth has become more urgent for banks than their leaders may realise, and the time to make those choices is now, or struggling banks will fall even further behind the pack,” he added.

In its analysis of 250 banks globally, Bain found only one in nine were sustained value creators – defined as banks that outperformed the market on revenue and earnings growth over the 10-year period, while delivering total shareholder return greater than the cost of capital. Of this number, 65% of banks are local or regional multi-category banks.

By contrast, only 4% of sustained value creators fit the global universal model – a result of slower economic growth, increasingly sophisticated local competitors and recent regulatory changes that have resulted in significant penalties for being global and universal.