IIC2020: ‘Global Trends and Disruptions for financial institutions of tomorrow’ – A session by Sir Howard Davies

Moderated by Navneet Munot, CFA

Contributed by: Ritika Mankar, CFA (*)

In case you missed this insightful session held as a part of 10^th India Investment Conference (IIC) organised by CFA Society India in Mumbai, scroll below for Ritika Mankar’s notes from the session.

Can the current recovery give way to a recession?
– Even as the world economy has maintained an average growth rate of 3.8% for a decade; he was of the view that despite this, a recession can be largely ruled out.
– What is likely to follow is a period of moderately lower growth and not drastically lower growth.
– It is easiest for a bank to make money when the yield curve is upward sloping since you can borrow short and lend long.  Despite the prospects of low GDP growth (and not no GDP growth), developed country banks now have a problem at hand since the yield curve in no longer upward sloping.
– Hence it is no surprise that most banks in Europe today are trading at a P/BV of close to 0.5x and in some cases even lower!

So what could be the reasons behind this situation?
– Potential reason#1: Whilst traditionally central banks (CBs) would only intervene at the shorter end of the yield curve, now CBs are operating all over the place!
– Potential reason#2: Has the demand for low risk assets begun to exceed the supply?
– Potential reason#3: Low productivity is acting as a disincentive for investments?
– Potential reason#4: Investment intensity has declined globally – since Apps are way cheaper to build than say a bridge!
– Potential reason#5: Over-regulation of the banking sector?

Regulation of traditional Banks in the developed world is rapidly increasing!
– The re-regulation of traditional financial firms since the crisis has been dramatic.
– Higher capital ratios for banks and tighter solvency rules for insurers. And there is still pressure for more capital and tighter consumer protection rules.
– Does this increased regulatory burden risk making conventional financial institutions uncompetitive? The low valuations of banks, especially in Europe, suggest that many investors think so.
– The said expert worries that the more you squeeze the formal financial sector through tighter regulation, lending will migrate to shadow banking where the risk management systems are significantly poorer than that for traditional banks.

Threats to traditional Banks given the rise and rise of Fintech.
– Trust in traditional banks in the developed world has been sinking dramatically. 40 yrs ago 92% users trusted their bank managers, today it is down to 20%.
– Fin tech in this context, promises to offer parts of banking services at significantly lower cost since the risk capital requirements here are significantly lower than that of banks.
– Big tech now training its vision on entering the financial services space. Unlike small fin tech; Google, Apple, Facebook and Amazon have huge financial resources and millions of customers already which can give traditional banks some serious competition.
– Also fin tech as well as big tech is significantly more agile and offer more innovation than traditional banks.

…and the Opportunity for traditional Banks
– Whilst tech is under-regulated today, regulatory frontiers are slowly and surely growing.
– Anti-money laundering and data security pose challenges for rapidly growing big-tech firms.
– Customer acquisition is undeniably a challenge especially when it comes to attracting the deposits business.
– Users of fin tech still rely on it is as a secondary financial service, a traditional bank is still the primary financial service relied upon.

Conclusion

So ‘Can Fintech get customers before Banks get innovation?’ If you know the answer to this question then you know who wins the race, traditional banks or fintech!

Comments regarding India
– India is severely under-banked and under-served but has unusually high access to telecom and data. This should make for a fertile ground for fintech!
– State ownership of banks has to and must decline. The private sector can be incentivised to do justice to welfare objectives, but the multiple costs PSBs are best avoided.

(*) Ritika Mankar, CFA is a Director on the CFA Society India Board and a Director at Ambit Capital