With their generally strong balance sheets and capitalization, banks in the US have stood up well over the past four months, with a clear focus on protecting the interests of their employees, customers and communities.
Although the impacts of the virus are ongoing, US banks are now beginning to focus on shaping their operating models for the new reality that lies ahead.
A number of trends are likely to dominate
Firstly, we will see a significant acceleration of digital. Prior to COVID-19, digital banking in the US was increasing moderately year over year – but the effect of recent months has been to jump that several years forward almost in one go. Online banking and mobile banking has increased significantly. It has become a business imperative for banks to invest in their digital journey, both to support customer demands and to reap efficiencies.
Secondly, we will see US banks increasingly focused on reimagining cost and developing new operating models. The context in which they are operating demands it – characterized by a downward trend in Net Interest Margins (NIM) due to the low interest rate environment and increasing loan loss provisions. The resulting pressure on efficiency ratios means that all aspects of operations will come under the microscope – from branch and real estate strategy to efficiencies from new ways of working, shared service usage and cloud, as well as more traditional cost cutting measures.
Alongside this, a strong focus on risk management will be critical. Operational risks have been prominent through Covid-19 with increased volumes coming into call centers and service centers, and trading moving into a remote environment making surveillance a key issue. Operational resilience, including cyber security, will be a strategic priority, but other risks will rank just as high. Credit risk will be a central concern over the next 12 months or more: banks will need to stay close to their customers, working through loan repayments, forgiveness and forbearance. Expected loss (CECL) modeling will be an important aspect, while banks will also be very focused on related modeling of capital and liquidity.
Across all of these activities, enhanced use of data & analytics, AI and other emerging technologies will be a key driver of success. In an age of digitization, data will sit at the heart of any bank – the organizations that can unlock that data to generate insights and model future trends, while keeping it secure, will be the winners of tomorrow.
In many ways, these trends mirror the trends we are seeing across the global banking landscape.
As the potential economic consequences of COVID-19 continue to evolve we encourage you to follow our regular Banking and Capital Markets article series as we share insights on the impact the pandemic may have on your business strategy and operation.
As we continue to navigate our way through COVID-19, there will continue to be frameworks and processes created. Financial Institutions who are able to navigate through the recovery with an eye on the new reality stand the best chance for a bright future.