More radical restructurings key to banks’ future profitability

“The first cut is the deepest,” according to the Cat Stevens song. But not, it seems, when it comes to the world’s banks.

After years of reviews, reorganizations and refocusing—during which banks have revamped business models and taken a scythe to their costs and headcount—still more needs to be done.

Existential crisis

McKinsey’s latest Global Banking Annual Review points to the “formidable forces” of a weak global economy, ongoing regulatory reform and disruption from digitization, which threaten to cut the profits of banks in Europe and the UK from $110 billion today to about $50 billion by 2020. ROEs, which have already slumped to around 3% to 4%, could potentially fall to just 1% or 2% over the same period.

The McKinsey report follows similar warnings from PwC and EY. Both have highlighted banks’ high and rising cost-income ratios, and the need to embrace far greater cost reduction targets and more radical restructurings.

To counter the challenges, the McKinsey report says banks need to undertake a three-pronged, fundamental transformation, focused on:

  • Resilience – ensure short-term business viability by protecting revenues, downsizing and cost cutting, strengthening balance sheets and safeguarding core assets.
  • Reorientation – redefine the customer experience by reconceiving the bank as a platform for digital and data processes and analytics, respond to regulation more strategically, and rethink the operating model with smarter sourcing and outsourcing approaches.
  • Renewal – embrace new technology and data capabilities and organizational structures to become more agile and able to support the frenetic pace of innovation.

Focus on core activities, outsource the rest

For most banks’ treasury divisions, the obvious answer to McKinsey’s “Triple-R” agenda is to outsource whatever parts of their middle- and back-office operations they can.

In truth, post-trade processing is hardly a core competency for treasury departments, or a value-added, revenue-generating activity. And these tasks are getting more complex and expensive all the time, as regulatory demands increase, processing times shorten and IT investment demands ratchet up.

By leveraging the expertise, scalability and IT sophistication of a dedicated third-party partner, treasury divisions can instead turn heavy fixed costs into a lighter variable cost … minimize operational and regulatory risks and burdens … stay current on the latest technology developments … enhance their responsiveness and business agility … and free precious internal resources to focus on those activities where they can add the greatest value.

For more information on how outsourcing can improve the performance and efficiency of your middle- and back-office operations, visit our middle office outsourcing website >>

André Vanem is Director of Sales for Northern Europe at SS&C Advent, and has 17 years of experience working with all type of investment management firms to help them achieve operational efficiencies and business growth.

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