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 in a group of banks in the US and Europe, and the client's vision of the new dynamic of relationship with his entity that will bring about the "new normality" once the pandemic is over. In conclusion, the financial industry is responding well to the transformational challenge of COVID-19, both on the part of operators and clients.
Figures Q1: Drop in ROE, revenue remains
First, BCG compares the business figures of the universe of banks analyzed, in the first quarter of 2020 versus the first quarter of 2019.
Three main conclusions can be drawn from the comparison:
- Revenues are holding up: they are down -1%, although the trend is downwards.
- Provisions are multiplied by four, which corresponds to the strength of the institutions' balance sheets. A positive factor.
- Business profitability falls sharply (ROE -60%). The scenario is therefore negative for this ratio.
The negative impact on ROE is greater for US banks than for European banks (6.6 percentage points versus 3.7 percentage points). The reason is that US banks provision more than European banks, and are unable 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 with a lower balance sheet -lower performance-. The result is an estimate of the fall in business profitability that ranges from the following parameters.
- Lower performance banks: Between -2 p.p. benign stage, and -11 p.p. severe stage.
- Higher performance banks: Between -3 p.p. benign stage, and -9 p.p. severe stage.
In this line, BCG also analyses the rise in provisions in the universe of banks analysed. The conclusion is that US banks are anticipating a worse economic environment than European banks, since they are increasing provisions by an average of 4.3 percentage points compared to the rise of 2.9 percentage points in Europe. Finally, when comparing Q1 2020 versus 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 analysis by the consulting firm BCG already pointed out: that COVID-19 will cause turbulence in the structure of the banking business, both because of the consequences on the economy -fall in consumption and recession-, the rates at almost zero levels in the long term, and the new environment for customer relations.
Improved brand image
The second part of the report focuses on the client's view of all these changes. To illustrate, 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 visiting, when the coronavirus crisis is over. By country, Norway has the highest percentage of customers who think this way - 39% - and the US has the lowest - 13%. As a curious fact, only 3% of American customers declare that they will never use the office again, compared to 25% of Norwegians.
- 12% have contracted the services of online banking or mobile banking in their bank because of this crisis. Where more in Singapore, 18%, and where less Australia 5%. By age group, 24% of customers between 18 and 24 years have done so, and only 2% over 65. Interestingly, this habit of contracting non-presential services has grown substantially in the last three weeks.
- 61% of customers surveyed who used the branch as a preferential channel for the relationship stated that if the branch was no longer used, they would open an account with their bank using another non-presential 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 institution. By country, 32% in the Netherlands trust their bank more, compared to only 3% who are critical.
- Perhaps to support this improvement in their opinion of banks, respondents valued some specific measures their institutions 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 least valued are the followings:
- Remote financial advice services.
- Tailor-made financial advice.
- ATM explanatory videos about banking products and services.
Conclusions
Therefore, in this second 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 increased role of Data Science or data analysis tools, whose usefulness will grow exponentially, according to the consulting firm.
This type of tool will be able to predict and anticipate with much greater accuracy than in traditional analysis, those trends that are most influential in the evolution of the banking business: income and expense scenarios, sales expectations, solvency estimates, or the evolution of consumption and the feeling of demand. Likewise, the tools that analyze "Big Data" will be able to better monitor transactions (for example, in credit cards), and model unemployment, helping banks to shape their growth strategies, and define the new model of Customer Experience.
Javier Ferrer
Financial Communications Manager at PROA Comunicación