Few universal banks offer value today: Bain

Singapore

A NEW report by Bain & Company offers yet another check on the universal bank model.

Its recent analysis of 250 banks globally showed that one in nine are what it dubbed sustained value creators. This was defined as banks that outperformed the market on revenue and earnings growth over the 10-year period, and at the same time, delivered total shareholder return greater than the cost of capital.

Bain did not provide the actual number, but that came up to 27 or 28 banks that are "sustained value creators". And of these, just 4 per cent fit the global universal model. One example cited was JPMorgan Chase.

"Strategy was dead, long live strategy," said Bain.

Bain noted that most of the global universal banks extended their footprint so broadly that today, they have "a long tail" of subscale countries or products that do not yield economies of scale, since the banks are not in leadership position.

"For years, given positive macro-economic trends and reasonable growth in emerging markets, global universal banks were not required to prove that synergies of scope, scale and funding exceeded the potential drawbacks of complexity and control challenges," Bain said. "However, slower economic growth, increasingly sophisticated local competitors and recent regulatory changes have imposed significant penalties for being global and universal. That forces global universal banks to reassess the value of this model."

And fortunes have been reversed. The three-percentage-point return on equity (ROE) advantage over other banks that global universal banks once enjoyed due to synergies is no more, with some global banks now posting an ROE discount as large as 3 percentage points, a Bain analysis showed. Indeed, 65 per cent of these better performing banks, by Bain's calculations, are domestic or regional lenders.

Meanwhile, the gap in total shareholder return between the best and worst of the 20 largest banks worldwide has widened from a 5 per cent variation from the average return between 1993 and 2003, to a 9 per cent spread over the 2003-2013 period.

Banks, in general, are also facing disruptive forces. Customers are increasingly willing to explore innovations such as peer-to-peer lending. And in developing markets, home-grown banks have been introducing more sophisticated services even as global banks retreat, said Bain.

"Those banks ... that hesitate or hope for the cycle to swing in their favour risk running out of time and being caught wrong-footed as the market evolves," it said.