Deloitte: Will 2015 be a turning point for banks’ profitability?

With the post-crisis remediation hopefully behind it, 2015 is shaping up to be the year the banking industry moves past “short-termism” to focus on improving the fundamentals of their businesses in the resolute pursuit of profitability.

This is in spite of the new challenges and greater competition that they will face, according to the report 2015 Banking Outlook: Boosting profitability amidst new challenges recently released by Deloitte.

Deloitte’s banking industry outlook explores a number of key issues of importance for the industry, including some actionable takeaways for industry leaders to consider.

In 2015, Deloitte believes that improved balance sheet management will become more necessary, and yet more complex. With new regulatory requirements such as the liquidity cover ratio and supplementary leverage ratio that were finalized in 2014, banks – especially the largest ones – will soon be forced to make changes to their balance sheets by holding additional low-yielding assets.

At the same time, banks have to address the rising interest rate environment by managing deposit outflows and reclassifying some securities in their portfolio from available-for-sale to held-to-maturity to avoid unrealized losses hitting capital, and that in the context of classification of financial assets under IAS 39. This effort to protect capital locks in yield on long-term securities which could reduce interest margins and / or adversely impact portfolio valuation as rates rise.

“Banks will need to manage their balance sheets against multiple – and sometimes conflicting – regulatory metrics simultaneously,” commented Joe El Fadl, partner and Financial Services leader at Deloitte Middle East. “This includes, for example, their capital requirements, two liquidity ratios and a leverage ratio, on top of their bail-in-able and stress testing requirements. In the short-term, the challenge of this task is further compounded by the fact that some of these metrics have not yet been finalized.”

As banking regulators step up their pressure on banks, the compliance function is finding itself facing unprecedented demands. Exacerbating the problem is a disjointed and uncoordinated regulatory reporting structure found in many organizations that leads to slower responses, inefficiencies and possible confusion, not to mention the real risk of noncompliance and fines. As a result, some of the leading organizations are looking at establishing central regulatory management offices (RMO) to drive consistency, streamline execution, and improve decision-making. In 2015, Deloitte expects more banks to embrace the notion of a central RMO.

But regardless of structure, significant risk-based decisions are made throughout the organization on a daily basis. Recognizing this, banks are placing a greater emphasis on integrating risk management, compliances and ethics into the organizational culture. “The new benchmark of a mature governance program will be the organization’s ability to weave risk-intelligent behavior into the fabric of the bank’s culture across the organization,” added El Fadl.

“Impacting culture requires first and foremost a strong “tone at the top”. Boards should effectively challenge senior management’s risk assumptions and business plans, documenting such instances for future reference. Further, risk management and compliance responsibilities should be reflected in performance management programs and reinforced in employee training.”

With the acceleration in the number and severity of cyber-attacks this year, there is every reason to believe these threats will only become more pervasive, sophisticated, and disruptive in 2015 and beyond. Even in instances where banks are not the direct targets of such cyber-attacks, their integral role in the payment ecosystem leaves them entangled in the often messy aftermath of security breaches, including but not limited to economic and reputational losses.