Greatest Challenges Facing Banking Industry and How I can Contribute to Solve Them

Presentation to Answer IE MBA Topic Question HJakarta, March 2017

By Ardyan H. Gumanti

After years of turmoil, global banking has settled into a new trends, characterized by stable re-turns and strong profits, but slow growth especially by US & Developed Countries’ Banks.

Asia-Pacific became one of the largest sources of global banking profits and will likely continue to deliver the bulk of in-dustry expansion in coming years. From the graph, It is seen that the share of global after-tax profits in banking generated by Asia Pacific increased significantly from 28% to 46% in 10 years.

Average ROE Revenue Growth

14.00%

16.80%

7.30%

3.90%

9.30%

4.30%

Pre Crisis (2002-2007) Crisis (2008-2011)

Even though profit continues to increase, average ROE is stagnating and revenue grows slowly. It can be seen that from 2011 to 2015, the average ROE and revenue growth only grow 27% and 10% consecutively.

Sources : Mckinsey & Co.

However, the growth unfortunately will not be continuous since Asian banks that became the source of growth for the past 5 years are beginning to slow down

Revenue growth are predicted to decline since the margins that are derived from the transaction are falling. With margins falling, Asia-Pacific is beginning to resemble the rest of the global industry. Af-ter rapid expansion and adversity following the 2008 economic crisis, the global sector appears to be settling into a new reality characterized by modest growth and steady ROE.

Sources : Mckinsey & Co.

The falling margin are caused by 4 main challenges; slowing economies, new attacker, weakening balance sheets, and new regulations.

The economic slowdown rolling across the world especially in Asia will affect banks and their customer. It is also expected that banking profit growth to slow from 10% p.a be-tween 2011 and 2014 to 3% p.a between 2016 and 2021.

FinTechs—start-up tech companies offer finan-cial products such as payment and lending platforms as well as established companies from other industries i.e. online marketplace are invading banking business

An increasing volume of non-performing loans is putting stress on banks as interest-coverage ra-tios are declining at large companies throughout the world thus making banks has to raise more capital to maintain CAR

Implementation of Basel III will has a huge impact on banking since its im-plementation is expected to decrease banks’ ROE by 13-14 percent-age points

EconomicSlowdown

NewAttackers

WeakeningBalance Sheets New

Regulations

Margin

Slowing economics especially from China has sent shockwave throughout banking industry.

2008Global

Eco-nomic Crisis

2008 - 2015• The slowdown

has been led by China, which hit inflection point in 2015, when foreign ex-change reserves fell 13 percent

• Economic growth had al-ready slowed a few years ear-lier, but hit a 25-year low of 6.9 percent in 2015. The macroeconomic brake was fol-lowed by weak-ening In-vestment and exports, while employment and wage growth rates also dropped

Economic Growth6.9%

44.8%3.8 to 3.3 Trillion USD

Investment

FX Reserve

For China, 2015 was an inflection point toward a different phase of eco-nomic growth

ForwardLooking

2016 - 2021

At the same time, net interest margin is expected to drop a further 4 percent annually between 2016 and 2021 after falling by 6 % a year from 2011 to 2016.

The 2008 global economic crisis sent shockwaves throughout many industries and had a particularly profound impact on banking. The eight years since have been characterized by slower revenue growth

Competition between banks as well as Financial Technology (FinTech) firms has made banks lower their margin

The rise of FinTechs has pressured banking profit pools and taken away customers. Retail services are a particular target,

FinTechs and established technology companies alike are benefitting from financial customers that are becoming more comfortable banking through digital channels.

Overall, the impact on banks in the world could be massive. Even Accenture predict that 44% of banks will be affected by Fintech.

Fintech Financing Activities

8%

20%

8%

4%4

%

56%

Bank Loose Market Share

Bank are disaggregated

Financial Services De-livered at lower margin

Core banking services are addend to non -fs offerings

Challengers acquired by incumbents

All player position themselves to add value

This is due to the fact there are a lot of banks that have not prepare for upcoming digital innovations

Banking Future

How equipped banks to face innovations?Fintech Development in Asia

Bank balance sheets are coming under increasing stress as a result of weakening loan portfo-lios

2009.5 2010.5 2011.5 2012.5 2013.5 2014.53

4

5

6

7

8

9

10

11

8.3

6.75.9 6.2

6.8 6.57.5

5.7

4.5 4.45.1

4.6

9

8 8

9.4 9.610

Developed Asia PacificEmerging Asia PacificAsia Pasific (combined)

Increasing in Stressed Assets (USD Bio)

Decreasing in Top 250 Companies’ Interest Coverage Ratio (%)

USD 600 Bn

Additional Capital Needed

Due to economic slowdown, a lot of companies especially from emerging country have seen their interest coverage decreased. Even though the Coverage Ratio from developed country’s companies is increasing, it can not offset the decrease of performance from emerging countries’ companies

The worse performance of the companies made the facilities given by banks to those companies categorized as Stressed Assets. The increasing stressed assets made the banks has to increase their capital as reserve for stressed assets

However, with bank’s recent weakness, banks are much less attractive for investors. since, theydid not reward in-vestors very well com-pare to other sectors

The implementation of new regulation has made ROE decline in considerable percentage. This decline is driven by new requirement to more than double Tier 1 capital in today’s capital mar-kets businesses.

• Existing minimum regulatory capital lev-els of bank were insufficient in relation to the exposures and losses that banks has suffered during crisis

• Capital adequacy at Basel I & II did not capture risk posed by bank exposures to transaction

• Basel I & II only focused on capital with no standard in liquidity

Background Key Elements Basel III Implementation

Capital Ratio

8%

Leverage Ratio

30:1

33:1>13%

LCR

>30 daysStressed

Periods

NSFR

>1 yearStressed

Periods

EffectsImplications

Reduced industry profitability (ROE)

Banks need to raise more capital to fulfill new common equity requirement

Greater competition/increased costs for retail deposits

Cost of funding will likely increase for all institutions

Stronger and more stable

balance sheets of

banks

Reducing Banks’ earning power during

good time

Safer and better able to survive during hard time

Banks will run several initiatives to face those challenges…

Certain promising segments remain untouched by most Financial institutions. Tapping Into these growth pockets – the unbanked and underbanked – can help banks rekindle bank momentum.

Growth Pocket Digitalization Strengthened Non Interest Income

Digital transformation will be crucial for Asia-Pacific banks to secure their profitability and revive their growth momentum since digital bank is cheaper to build and operate.

Optimizing &Efficiency

Unbanked People (%)USD Mio

Cost of Traditional vs Digital

Due to the declining of interest income caused by competition and also increasing stressed asset due to economic slow-down, banks need to find new source of income through transaction fees. Income growth of this new source will offset the decline of NII and making banks’ revenue grow fur-ther

Interest Income vs Fee

For at least the last seven years, banks have focused even more on their cost-to-income ratios as they seek a return to reliable and sustainable profitability. In fact, since the 2008 crisis, it's estimated that global banks have succeeded in taking out billions of dol-lars in costs

Bank Efficiency Ratios

I want to take part as a Consultant focusing on financial Institutions in Indonesia to help Indonesian banks meet these challenges

Room to grow for Indone-sian banking since the market is still under-served

Got the exposure of vari-ous kind of banks and problems faced

Working with C-level execu-tives will shape how I see problem as a CEO. Those view will benefit me to real-ize my LT goal to es-tablish P2P Lending Platform

Why

As a Consultant focusing of Financial Institutions in Indonesia, I want to advise banks’ management to face challenges ahead by working together to implement several initia-tives

Establish efficient business By enable decision making capabilities that im-

prove company’s effectiveness

Develop strategies so that banks can adjust business models, refocus long-term strategy, assess business portfolios, & explore new

markets and partnerships.

Help banks adapt distribution and service channels as well as reduce back-office costs and optimize service operations

through technology

Improve banking customer strategy by redesigning

bank’s products ,increasing sales effectiveness and devel-oping unparalleled cus-tomer loyalty programs that boosts bank’s profit.

With my experience as a Corporate Banker, I have already possess some qualities to become a good consultant

Banking Knowl-edge

Leadership Skill

Relationship Skill

International Experi-ence

My experience in both working and leading teams of 5 people cross functions to achieve common goals has enabled me to develop my leadership skill

My experience as Relationship Manager has trained me to meet new people and make good relationship with them

My experience as Banker for 5 years has made me have a deep understanding about how banks work

I have an experience in working with 2 multinational teams for syndicated loan deals. That experience has broaden my network and also my view about culture around the world

Business Knowl-edgeMy experience as Banker

has made me able to understand how business work in Indonesia& SE Asia

IE can help me to become well rounded consultant in Financial Institutions through the school’s breakthrough curriculum and supportive environment

Mastering Business Fundamen-

tals

EnhanceSoft Skills

EntrepreneurialMindset

MultinationalEnvironment

Given my engineering background, IE focus in teaching business fundamentals will

benefit me

IE Professional Fitness Program will prepare

me to face the competitiveness of

business world

Given my LT Goal is to establish P2P Lending Platform, I need to enhance my entrepreneurial mindset

through the program

The environment will broaden my net-work and expertise that I can leverage to reach my future

goals

THANK YOUGRACIAS