Covid-19 makes transformation more urgent for banks

28 April 2020 Consulting.us

The Covid-19 pandemic has compounded the issues global banks faced before the crisis. According to report “Global Risk 2020: It’s Time for Banks to Self-Disrupt” from consulting firm BCG, banks need to act now to optimally emerge from the pandemic period.

Economic profitability has been down at global banks in recent years. Since 2014, total economic profit has fallen by over half, from 15 basis points to 6 in 2018. Only banks in North America have been building a sustainable recovery, according to the report.

The Covid crisis is the most daunting test that the global financial system has faced since the 2007-2009 financial crisis. With businesses shuttering for unknown periods of time, banks will see margin and volume compression because of lower interest rates and dampened client activity and investment. Credit risk will also be an issue as clients face liquidity pressure.

Most economists expect a recession because of Covid, but the severity is unknown. After the “firefighting” response of the first few weeks of the crisis, banks will enter a hybrid stage that is neither a "return to normal," nor a "new normal." BCG recommends that financial institutions do three things to optimally manage through this period.

North America and Europe Show Growth in Economic Profit, but APAC Slides Further

Reinforce essential activities

Banks will need to maintain strong liquidity and funding mechanisms. Though support measures from the government and central banks are helping significantly, banks need to make sure these measures reach affected functions and clients efficiently.

They will also need to shore up credit risk management, with risk drivers related to Covid not currently captured by credit ratings systems. With effects varying by sector and client, banks will need to make sure they understand and mitigate their risk positions properly.

Banks should also update compliance priorities, assessing projects based on bank risks and commitments, and what effort is required to deliver appropriate compliance.

Anticipate downstream impacts

The economy is experiencing a supply shock, demand shock, and oil price shock at the same time, with varying impacts across sectors. BCG says banks will have to gauge how different sectors are affected through detailed scenario planning. They should also revisit business continuity plans to anticipate the wider ripple effects over the next 12 to 18 months, while addressing risks and processes around cybersecurity, anti-money-laundering, liquidity, and credit.

Accelerate digital transformation

The previous tactical improvements banks have attempted haven’t delivered the needed transformation, according to the report. With BCG stating that digitization is key to resilience in the banking industry, the pandemic makes effective, large-scale transformation even more pressing.

“By using AI, machine learning, and other advanced technologies and practices, banks can improve overall steering, deliver predictive real-time insights, and execute faster and more efficiently. Yet success requires a willingness to see disruption not as a threat, but as a lifeline,” noted the report.


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