In its second analysis of the transformation of the banking business brought about by COVID-19, the Boston Consulting Group (BCG) focuses on the impact on business profitability at a number of banks in the US and Europe, and the customer's view of the new relationship dynamics with their bank that the "new normal" will bring once the pandemic is over. It concludes that the financial industry is responding well to the transformational challenge of COVID-19, both on the part of operators and customers.
Q1 figures: ROE falls, revenues hold up
First, BCG compares the business figures of the universe of banks analysed, in the first quarter of 2020 versus the first quarter of 2019.
Three main conclusions can be drawn from the comparative analysis
- Revenues are unchanged: down -1%, although the trend is downwards.
- Provisions increased fourfold, reflecting the strength of banks' balance sheets. A positive factor.
- The profitability of the business falls sharply (ROE -60%). The scenario is therefore negative for this ratio.
The negative impact on ROE is greater in US banks than in European banks (6.6 p.p. vs. 3.7 p.p.). The reason for this is that US banks provision more than European banks and do not manage to avoid cost increases. On the other hand, European banks provision less and manage to reduce costs.
BCG forecasts a fall in ROE between Q1 2019 and Q1 2020 in three scenarios, benign, medium and severe, for banks with a high balance sheet -which it calls higher performance- and those with a lower balance sheet -lower performance-. The result is an estimated drop in profitability of the business that ranges between the following parameters
- Banks lower performance: Between -2 p.p. benign scenario and -11 p.p. severe scenario.
- Banks higher performance: Between -3 p.p. benign environment and -9 p.p. severe scenario.
In this line, BCG also analyses the increase in provisions of the universe of banks analysed. The conclusion is that US banks anticipate a worse economic environment than European banks, as they increase provisions by an average of 4.3 p.p. compared with 2.9 p.p. for European banks. Finally, when comparing Q1 2020 vs. Q1 2019 revenues for each bank, the range is almost 40 p.p., between +20% for Barclays and -18% for Wells Fargo.
In general, this part of the report confirms what the first BCG analysis already pointed out: that COVID-19 will provoke turbulence in the structure of the banking business, both because of the consequences on the economy (fall in consumption and recession), rates at almost zero levels in the long term, and the new environment of customer relations.
Improved brand image
The second part of the report focuses on the customer's view of all these changes. To illustrate this, BCG publishes the findings of a survey of 5,000 retail customers in 15 countries. They are as follows:
- 24% of respondents plan to reduce the frequency of office visits, or simply stop, when the coronavirus crisis is over. By country, Norway has the highest percentage of customers who feel this way - 39% - and the US the lowest - 13%. Interestingly, only 3% of US customers say they will never use the office again, compared to 25% of Norwegians.
- 12% have used online banking or mobile banking services with their bank because of this crisis. Most in Singapore (18%) and least in Australia (5%). By age bracket, 24% of customers aged 18-24 have done so, and only 2% over the age of 65. Interestingly, this habit of hiring non-face-to-face services has grown substantially in the last three weeks.
- 61% of customers surveyed who used the branch as their preferred channel for the relationship stated that if the branch was no longer used, they would open an account with their bank using another non-face-to-face channel. By country, Denmark has the highest percentage - 73% of customers, of which 31% would use mobile banking and 42% online banking - and France the lowest - 45%, of which 12% would use mobile banking and 34% online banking.
- The most curious fact is the substantial improvement in the brand image of the banks expressed by the customers surveyed. Thus, less than 5% are critical of their operator's response to this pandemic, and 25% express greater confidence in their bank. By country, 32% in the Netherlands are more confident in their bank, compared to only 3% who are critical.
- Perhaps to support this improvement in their opinion of banks, respondents value some concrete measures that their banks have taken to mitigate the impact of the COVID-19 crisis.
- Among the most useful are the following:
- Reduce ATM fees.
- Offer lower rates on financing services.
- Lower fees for cash advances, overdrafts, remote deposits.
- The lowest rated are the following:
- Remote financial advisory services.
- Tailor-made financial advice.
- Explanatory videos at ATMs on banking products and services.
Conclusions
For all these reasons, in this second BCG report BCG shows with data its thesis that the financial industry, both operators and customers, has assumed that the transformation of the banking business will be profound in the new normality after COVID-19. For this reason, BCG points to the greater role of Data Science or data analytics tools, whose usefulness will grow exponentially, according to the consultancy firm.
This type of tool will be able to forecast and anticipate with much greater accuracy than traditional analysis the most influential trends in the evolution of the banking business: income and expenditure scenarios, sales expectations, solvency estimates, or the evolution of consumption and demand sentiment. Tools that analyse Big Data will also be able to better monitor transactions (e.g. credit cards) and model unemployment, helping banks to shape their growth strategies and define the new Customer Experience model.
Javier Ferrer
Head of the Financial Communication Department at PROA Comunicación