Pub. 8 2018 Issue 2

17 ISSUE 2. 2018 Six themes driving banking industry trends For 2018 and beyond, banks must contend with multiple challenges tied to regulations, legacy systems, disruptive models and technologies, new competitors, and a restive customer base while pursuing new strategies for sustainable growth. Our 2018 Banking Industry Outlook examines the six macro themes—from customer centricity to cyber risk—facing each of the industry’s five primary business segments in the coming 12-to-18 months. Firms that can address these emerging challenges and opportunities to effectively balance long-term goals with short-term performance pressures could be amply rewarded. Playing the long game For banks globally, 2018 could be a pivotal year in accelerating the transformation into more strategically focused, technologically modern, and operationally agile institutions, so that they may remain dominant in a rapidly evolving ecosystem. This metamorphosis is far from easy as most banks grapple with multiple challenges: complex and diverging regulations, legacy systems, disruptive models and technologies, new competitors, and, last but not least, an often restive customer base with ever-higher expectations. In this outlook we explore the challenges most banks face in balancing the need to restructure their foundations for the long-term with finding near-term growth. We do so by identifying six macro themes that should be critical for long-term growth: 1. Customer centricity 2. Regulatory recalibration 3. Technology management 4. Mitigating cyber risk 5. Fintechs and big techs 6. Reimagining the workforce. Then we drill down into five business segments to address how these long game themes may begin to play out in the next 12-to-18 months (see figure 1). But first, some background on the global economy: Real gross do - mestic product (GDP) growth should stay healthy across most major markets (see figure 2), giving most lines of business some room for topline expansion. Also, the continued tightening of labor markets in the United States and more recently in the European Union 1 should fuel income gains and credit expansion for retail banks in the Figure 1: Six macro themes and five banking businesses near term. This favorable situation could also lead to monetary tighten- ing, as the European Central Bank may gradually reduce its quantita- tive easing program, and raise interest rates, as the Fed has done. 2 Meanwhile, real fixed-business investments and corporate profits may also rise, albeit at low rates. And corporate tax reform, as currently proposed in the United States, could mean repatriation of US corpo- rate profits leading to a surge in business investments. On the flip side though, large unfunded tax cuts could fuel concerns in bond markets about the long-run sustainability of US budget deficits. Finally, backlash against globalization and foreign trade 3 does not seem to have manifested in damage to cross-border flows. In the end, banks have to contend not only with running the bank, but also transforming the bank to grow in a sustainable manner. Banks will likely have no choice but to balance these goals against the exigen - cies of the day. And those that are able to achieve this balance could be amply rewarded. Customer centricity Long-term sustainable growth in the banking industry seems only possible with a radical departure from a sales - and product- PERSPECTIVES 2018 Banking Industry Outlook 2018 Banking Industry Outlook w Continued on page 18