Banks forced to change business models and strategies in response to regulatory pressures, according to KPMG Report

Pierre Fourie, Head of Financial Services Markets, KPMG South Africa.

Rising regulatory pressures, combined with economic and commercial factors are forcing banks to reexamine their business models and strategies. The second of the 2015 “Evolving Banking Regulation” reports, Bank Structure: The Search for a Viable Strategy, reviews the challenges facing banks and offers a roadmap for achieving a sustainable model that can succeed in a markedly different operating environment.

“This is a watershed moment for the industry as banks must respond to not only heightened regulatory scrutiny, but increased competition, slowing economies, and changing customer demands and behaviour,” says Giles Williams, Head of KPMG’s EMA Financial Services Regulatory Centre of Excellence. “Just deleveraging and derisking alone will not address the myriad of issues confronting banks. Banks that thrive will equally focus on improving profitability and strategies for growth.”

The report details how regulatory and commercial pressures have changed the rules of the game in banking, and highlights the dimensions where banks need to change accordingly.

A unique Regulatory Pressure index, analyses the regulatory impact on 17 types of assets and liabilities on banks’ balance sheets, measuring the extent of the pressure being created and impact it is having.

“Balance sheet restructuring has generally been the first and most obvious response globally to increased regulatory and economic pressures,” said Pierre Fourie, Head of Financial Services Markets, KPMG South Africa. However, this has not increased what in many cases are very low returns on assets and returns on equity. Banks that are facing a large gap between return on equity and cost of equity need to consider a fundamental overhaul of their business models including exiting many capital hungry areas like private equity.”

The report discusses the steps required for successful overhauling of a bank’s business model, including managing out non-performing exposures; capital optimisation; repricing; cost reduction; and development of revised strategy.

“Banks face higher costs from regulatory reforms and commercial pressures to become more profitable,” adds Fourie. In addition to investor intolerance for very low profitability, there are signs of more proactive supervisory intervention potentially focused on removing non-viable banks from the system. The pressures impact larger and smaller banks somewhat differently, but all banks can benefit from taking steps to ensure the sustainability and viability of their business models and strategies.”

The Bank Structure: The Search for a Viable Strategy report follows the first part of the “Evolving Banking Regulation” series for 2015, which detailed the multiplicity of regulatory pressures on banks. Future reports in the series in coming months will focus on data and cybersecurity, conduct and culture, and supervision.