Rethinking the universal banking model
Forum Finance
Middle East, Turkey and North Africa
7th Edition
EDITORIAL | Forum Finance
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burning questionsfor the region.
The Financial Majlis is also an opportunity to
The global financial crisis of 2008 changed the
world of banking in many ways, and this issue of
Forum Finance examines its effect at both macro
and micro levels.
At the macro level, we explore the decreased
relevance of the universal bank model in the face
of more stringent regulatory oversight globally
and greater liquidity, leverage and capital requirements. This trend is just starting to affect banks
in the Middle East, and we discuss how Arab
bankers can get ahead of the game and even turn
the trend to their advantage.
Turning to the micro level, we look at some of
the factors underlying Al Hilal Bank’s impressive
growth over the past five years. In an interview,
Mohammed J. Berro, group CEO of Al Hilal
Bank, discusses how the bank has been innovating and trying to redefine the customer’s experience in order to strengthen the bank’s brand.
We think you will find both articles interesting
and provocative. As always, we welcome your
comments and questions.
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Julien Faye
Partner
Head of Middle East Financial Services practice
Forum Finance Newsletter 7th Edition,
julien.faye@bain.com
April 2013
Copyright © 2013 Bain & Company, Inc. All rights reserved.
Content: Julien Faye, Philippe De Backer, Tom de Waele,
Bianca Leodari, Erik Gordon
1
POINT OF VIEW | As the universal bank declines, what’s next?
POINT OF VIEW | As the universal bank declines, what’s next?
AS THE UNIVERSAL BANK DECLINES, WHAT’S NEXT?
by Philippe De Backer and Tom de Waele
markets where they don’t have an advantage.
Although these pressures have not yet been
acute in the Middle East, they are inevitable and
will be amplified by structural factors unique to
the region. Bankers in the Middle East can get
ahead of the game by anticipating how this transition is likely to play out in their markets.
Philippe De Backer
Tom de Waele
Principal
Partner
Head of Global
Middle East Financial
Financial Services practice Services practice
philippe.debacker@bain.com
tom.dewaele@bain.com
The universal bank model has run its course.
New regulations spurred by the financial crisis of
2008 have resulted in more stringent oversight
and greater liquidity, leverage and capital requirements. And market forces are working against
the universal model as well (see Figure 1).
To stay competitive, forward-thinking universal
banks around the world have begun to narrow
their focus on market segments in which they
already have a leadership position, exiting other
You can’t fight the tide
Big banks have long sought to offer a broad
range of categories from asset management to
insurance and fixed income, with the promise
that a cross-selling supermarket would entice
customers and smooth out cyclical fluctuations
of each product or service. Over the decades,
regulations have alternately discouraged and
favored having diverse offerings housed in one
company; for example, Basel I encouraged diversification, while Basel II and Basel III discouraged it. The giant universal powerhouses
emerged in the latter half of the 20th century,
mostly in the US and UK but in parts of Europe
and Asia as well.
Today the breakup pressure has intensified to the
point where few, if any, universal banks will maintain their current structure. Basel III’s requirements curtail lending and discourage banks from
competing in higher-margin, riskier assets. Country regulations in the US, UK and EU impose
ring fences around speculative trading activities
in order to minimize depositors’ exposure. And
regulators’ stance looks to get only stricter in the
wake of recent credit-derivative trading losses,
the libor rate-fixing allegations and moneylaundering allegations.
Under the new regulatory regime, which raises
complexity and compliance costs, management
faces two big challenges:
1. How can a bank maintain profitability with
greater capital and liquidity requirements
combined with constraints on leverage? Some
erosion of margins may be inevitable, but identifying services and customer segments with the
most attractive margin opportunities becomes a
pressing issue.
2. How can one efficiently fund investment
banking operations? With fewer assets outside
of core capital and with lower credit ratings,
investment banks face a higher cost of debt funding. Their earnings will be both reduced and
more volatile, which makes for a higher cost of
equity. Taken together, this implies a high cost of
capital, making investment banking unappealing
than in the recent past.
Regulatory pressures aside, shifts in the marke
place are also prying apart the universal model.
First, consumers’ embrace of online and mobile
channels has accelerated, moving the digital
platform to the center of the retail bank offering
(see Figure 2).
Digital channels can make routine transactions
such as bill paying fast and convenient. If
executed well, digital channels also can divert
volumes from branches at less than 5% of the
cost. The branch network will evolve to a very
different shape, with some branches closed and
others reformatted to capture the full opportunity of their local market. Building out the digital
platform and redesigning the branch network
will require significant investment and management attention, and smaller players in the Middle
East will have a hard time keeping up.
Figure 1: Stock price evolution: Universal banks vs. others
Figure 2: Digital channels are penetrating very quickly vs. traditional channels
Indexed stock price over time
Usage of US households in years after channel introduction
Forecasted
400
100%
Asset managers (+200%)
300
200
S&P 500 (+67%)
Investment banks (+49%)
Retail banks (+20%)
Universal banks (-27%)
100
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: Thomson Reuters, Capital IQ, Bain analysis
Note: Global sample used: 13 Universal Banks, 5 Asset Managers, 2 Investment Banks and 5 Retail Banks
2
Actual
2013
Small business
online banking
80
60
Social
media
ATM
Online
banking
Mobile
banking
40
20
0
5
10
15
20
25
30
Note: Years indexed to reflect years since channel introduction
3
POINT OF VIEW | As the universal bank declines, what’s next?
Second, in corporate lending, there’s a growing
tendency of larger companies to tap bond
markets instead of bank loans. That has reduced
margins and caused banks to reach out to smaller
clients, which are more costly to serve.
Finally, in asset management, independent
managers have emerged to capture market share.
Banks are more constrained in investment types;
for instance, they’re shut out from dark pools,
equity trading systems that do not publicly
display orders.
These market changes are causing universal
banks to become more specialized and focus on
their most profitable business lines and geographies. Some will focus on wealth management,
some will exit investment banking entirely and
others will pull in their far-flung operations to
focus only on their home country. Expanding
into new businesses or remaining subscale will
be quite difficult given capital constraints and the
high cost of fresh capital due to investors’ reluctance to divert capital into a sector with declining
returns.
For the businesses that do merit focused investment, success will hinge on honing operations to
deliver an exceptional experience to customers,
whether through fast and convenient digital channels or through valuable advice from knowledgeable specialists.
Implications for the Middle East
Middle Eastern banks are not immune to the
market forces we’ve described. Indeed, some
characteristics specific to the Gulf Cooperation
Council (GCC) region could actually exacerbate
the effect on universal banks.
4
POINT OF VIEW | As the universal bank declines, what’s next?
Small and medium-sized enterprises (SMEs) are
a major pillar of the market economy and an
essential building block of economic development in the GCC region. Banks in the GCC are
reluctant to lend to SMEs due to higher risk and
applicants’ failure to meet loan conditions, meaning that 55% of SMEs do not have credit
available to them. Digital channels could help in
this regard, but GCC banks lag in making digital
investments.
For smaller banks, access to capital markets has
been limited and expensive. Especially in investment banking, local banks also face stiff competition from international banks with stronger reputations, more experience and a global reach
especially in investment banking. Even much
local wealth is managed offshore.
Figure 3: Banks’ expectations on returns
Average market return on equity
40%
33%
30
24%
To address these challenges, we expect to see more
GCC banks join forces as a way to build sufficient
scale in the businesses where they choose to
compete. Integration could come in the form of
strategic partnerships, mutual back offices or other
infrastructures, or outright mergers and acquisitions. We also expect to see many GCC banks
curtail their ambitions to expand abroad.
23%
20
18%
12%
10
0
ROA
When it comes to regulation, laws around mortgages and debt already impose more constraints
than in most other regions. Regulations have not
been standardized across the GCC, and sometimes even within a country; banks in Saudi
Arabia are regulated by both the Saudi Arabian
Monetary Agency and the Capital Market Authority. Additional or tighter restrictions could follow
in the wake of regulatory reforms elsewhere
around the world.
-58%
11%
13%
13%
14%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2.9%
2.5%
2.2%
1.9%
1.3%
1.2%
1.5%
1.4%
1.4%
-50%
Sources: Banks’ annual reports, Deutsche Bank
Glimmers of an opportunity could emerge in the
GCC as certain businesses become unattractive
to private players abroad, such as infrastructure
lending. To date, we’ve heard mostly about
government-funded Asian infrastructure lenders,
like China Development Bank and Eximbank in
South Korea. The same method could apply to
the GCC if governments here show a willingness
to provide funding. But before they explore such
opportunities, GCC banks that have followed
the universal model will want to get their core
businesses on a narrower, more solid footing.
To do so, Middle East bank executives can start
by asking two fundamental questions:
1. In what ways do we need to change our
portfolio mix?
2. How should we change our business model to
continue growing the businesses we keep?
Addressing these questions will start the process
of unpacking the universal model to devise a
narrower but stronger model for the future.
5
INTERVIEW | Mr. Mohammed J. Berro, Group CEO, Al Hilal Bank
INTERVIEW
Mr. Mohammed J. Berro,
Group CEO, Al Hilal Bank
The real differentiation
lies in the way you
provide banking services
and create a positive,
rewarding experience for
your clients.
INTERVIEW | Mr. Mohammed J. Berro, Group CEO, Al Hilal Bank
Bianca Leodari: Al Hilal Bank is one of the
most remarkable success stories in the UAE
banking landscape. Established in 2007, the
bank had impressive growth in assets, top line
and profitability through the adverse 2008 to
2009 cycle. What is behind that success?
What sets you apart from your competitors?
Mohammed J. Berro: We owe our success to
various factors, both internal and external. First,
Al Hilal Bank was established shortly before the
financial crisis, so we used the situation to our
benefit. We were not exposed to toxic assets or
risky businesses, and, as we went to market, we
could see clearly where and where not to play.
Also, while the crisis brought a severe liquidity
squeeze in the UAE, we had a sound capital base.
During 2008, 2009 and part of 2010, most UAE
banks were busy refocusing, de-leveraging and
restructuring balance sheets. So liquidity was
scarce, competition was distracted and there we
were: liquid, selective and geared for growth.
Looking at the internal success factors, we had
the advantage of being new. We did not carry a
legacy, or change to manage. Being nimble and
relatively unconstrained was a great advantage
and maintaining it is one of my biggest
challenges to this day. We also had the vision of
redefining banking, and in particular to change
the perception of Islamic banking both locally
and globally. We assembled the right team to turn
that dream into a reality—this was another key
success driver. Furthermore, being associated to
the Abu Dhabi economy and being supported by
the Abu Dhabi shareholder have been great
assets for us throughout these years.
Julien Faye: “Redefining Islamic banking” is
an ambitious dream. How do you think Al
Hilal—or any other player—can change the
rules of the game in the banking industry?
6
MJB: I think redefinition can happen in the
“how” of banking, rather than in the “what.”
The “what,” the products, can only be differentiated at the margin. The “how” is branding the
customer experience. For me the question is:
Can a bank become a brand? You’d like to own
an iPad because it’s an Apple product. You want
to wear a Polo shirt because of its logo. Can you
think of a bank the same way?
At Al Hilal, we are trying to develop that brand.
We strive to be creative and innovative in the way
we approach things. We ask ourselves: How can
we improve the experience, knowing that ‘enjoyment’ is not what people normally associate with
a visit to the bank? Examples of ideas that we
have explored in this regard are a “financial
mall,” a drive-through bank, having coffee shops
in our branches and even our own airport
lounge. We launched the world’s first 100% electric
mobile bank that is eco-friendly. We have become
the official bank partner of KidZania as well.
We also had the vision of
redefining banking, and in
particular to change the
perception of Islamic banking
both locally and globally.
Philippe De Backer: By the way, this is exactly
what major luxury brands are doing: trying to
“materialize” the brand experience. This is
why, for instance, Chanel and Armani now
have restaurants in their shops. The boundaries of the experience are no longer limited
to products and services.
MJB: Exactly. You cannot “re-create” a personal
loan. You can make it faster, pre-approved, but
not change the product itself much. The real
differentiation lies in the way you provide those
services and create a positive, rewarding experience for your clients.
7
INTERVIEW | Mr. Mohammed J. Berro, Group CEO, Al Hilal Bank
BL: How important is technology in defining
customer experience, and more broadly, in
providing competitive advantage?
MJB: It depends on the segment or product we
are talking about, but in general I strongly believe
in technology as a key differentiating factor.
The question is: Can a bank
become a brand?
The UAE is one of the most technologically
advanced countries in this region. We house a
very high percentage of population under the
age of 20. If you combine that with strong
economic fundamentals, you are looking at the
development of a new breed of people over the
next 5-10 years. It will be a paradigm shift. My
children are growing up “breathing” digital;
tomorrow they will not do banking the way you
and I are used to.
That is why Al Hilal’s technology outlook is a
medium-term one: Ten years from now we want
to be the No. 1 bank to cater to this new generation. We are investing to take technology to a
new level. We don’t just want our clients to be
able to pay their bills online, we want to create
“data intelligence” by, for example, helping
clients understand their spending patterns. That
is the kind of service we are working on,
especially for our affluent customers.
JF: We talked about your success story to
date. Looking ahead, how will Al Hilal organize itself for the next wave of growth?
MJB: The future calls for focus: being the best in
certain segments, geographies or products. The
crisis taught us that lesson. In the next five years
we will focus on what we have identified as
high potential areas: affluent banking and
8
medium/large corporates, while serving the mass
segment on a fully digital platform. There will of
course be other opportunities and we won’t be
blind to them but we aim to be the best in those
businesses, and I believe that is what will deliver
us sustainable growth.
PDB: My last question is more personal question. You have been through many achievements as CEO of Al Hilal Bank. What lessons
have you learned along the way?
MJB: Establishing a bank is very different from
running one. It requires you to have a dream,
believe in it and know how to turn it into reality
by working with others. I realized that people like
to have a dream, so inspiring and motivating
them to make it happen is critical.
In the setup phase, you also need to be very
hands-on; a CEO will play more of a COO role.
Not compromising on the deliverables is key.
The moment you compromise, you unknowingly
create a compromise culture within your organization, and a gap for your competitors to fill. You
need to focus on challenges, on the underperforming 5% or on the unhappy 5% of customers
rather than on the 95%. The 5% is what can
really drive perfection and differentiation.
Establishing a bank is very
different from running one. It
requires you to have a
dream, believe in it and
know how to turn it into
reality.
And finally, be close to your people. It sounds
obvious, but it is critical. Having an open-door
policy, talking and listening to your staff, engaging them regularly are the keys to maintaining
team spirit and a close connection with your
organization.
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Contact information for Bain Middle East, Turkey and North Africa Financial Services practice
Julien Faye
Partner
Bain & Company
Telephone: +971 4 365 7350
julien.faye@bain.com
Philippe De Backer
Partner
Bain & Company
Telephone: +971 4 365 7360
philippe.debacker@bain.com
Karaca Kestelli
Partner
Bain & Company (Turkey)
Telephone: +90 532 3377 670
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