Financial industry haunted by 2008 crisis ghosts

Life was never going to be the same again for the once high  flying banking industry executive after general conclusions that the 2007/08 economic crisis rested firmly on the behavior of many bankers.

To some extent the latest PwC report on the state of the financial services industry seems to confirm this. A statement announcing the report said the financial services industries across the world are grappling with the severe stresses of a challenging economy, low interest rates, changing regulation, technological developments, and pressure on reducing pay.

“Leaders in the financial services sector are still facing some of the most challenging business conditions of their careers as profitable margins come under considerable pressure amidst the recent economic uncertainty and businesses struggle to come to terms with potentially disruptive changes in regulation and legislation,” said Tom Winterboer, PwC Financial Services Leader for Southern Africa and Africa.

The report said South Africa’s CEOs were contending with very similar issues as their global counterparts.

Johannes Grosskopf, Banking and Capital Markets Leader for PwC Africa, said “Many banks are adjusting their business models with the aim of restoring return on equity (ROE) to as near pre-crisis levels as possible by following a new formula of risk weighted asset (RWA) optimisation and other initiatives.” However, pursuing an over ambitious RoE target may result in false economies, and following too rigid a RWA optimisation could result in distorted business decisions, such as product pricing, warns the report. Banks need to be conscious of the possibility that although their actions may be rational at one level, they may result in frustrating the intentions of policymakers and precipitate a fresh wave of intervention and regulation.

Grosskopf added that the banking industry was expected to settle into a new long-run equilibrium financial model over a three to five year period, defined in terms of a capital structure, which will satisfy all stakeholders.

However the statement noted that the PwC global CEO survey, CEOs in the banking and capital markets sector remain positive about their growth prospects, despite the recent economic uncertainty of last year with almost 90% anticipating increased revenues in the next 12 months and over the next three years. In the next 12 months, 78% of banking capital market leaders anticipate expansion of their key operations in Latin America, 72% in South-East Asia, and 88% in Africa respectively.
It added that despite most insurers’ optimism about revenue growth in the near term, most see the prospects for the overall economy as tentative at best, with only 15% of CEOs believing that it will improve over the next 12 months. Nearly a quarter expect the economy to decline, though this is a much less pessimistic outlook than last year, when nearly half anticipated worse times ahead.

The statement said with slow growth in mature markets, many CEOs see greater potential in the still largely under penetrated emerging markets of South America, Asia, Africa, and the Middle East.

Victor Muguto, Long-Term Insurance Leader for PwC Africa said “Worldwide the insurance industry is also undergoing regulatory change”. South Africa’s regulators are also implementing proposals similar to Solvency II in Europe adapted to local conditions, more particularly SAM.

Muguto said SAM will undoubtedly result in significant changes and challenges for insurers, but it should be a regime that leads to better capturing and management of risk resulting in insurers not holding more capital than they should. “The primary purpose of the SAM regime is the protection of policyholders, which will be achieved through developing a risk-based approach to supervision; aligning insurers’ capital requirements with their underlying risks and providing them with incentives to adopt more sophisticated risk management processes.”

In addition to the implementation of the SAM regime, South Africa has its own social reform agenda which could change the way insurers carry out their businesses over the next few years. Some of these include proposals to treat customers fairly which are aimed at regulating the market conduct of financial services providers, and pension, health and retirement fund proposals which are still in the process of development.

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