A Year Full Of Duties For Banking – We Will

“Banking is necessary, banks are not” (“Banking is necessary, banks are not”). These words of the president of Microsoft, Bill Gates, pronounced in 1994, were premonitory of the digital revolution in which all sectors are currently involved, including the financial one.

After a 2019 marked by the narrowing of margins derived from an environment of low interest rates, the situation in 2020 is not expected to be very different. Negative rates are affecting the typical banking business, which has resulted in a decrease in ROE (Return on Equity). And as proof of this statement, a button. This ratio in the case of Banco Santander, BBVA or CaixaBank fell, at the end of the third quarter of 2019, by almost two points in relation to the same period of the previous year.

Bank result
Bank resultPHOTO: M. RosellóThe reason

Thus, the industry will have to take measures to adapt to this year’s unfavorable context, which will also be very marked by the slowdown and growth in non-performing loans. The report “The challenges of the financial industry for 2020”, prepared by the Institute of Stock Market Studies (IEB), includes the lines of action to follow to pass the “drink” and that, as it reveals, they must go through processes of concentration, for digitization and for the application of sustainability criteria.

The Association of German Banks calculated that zero rates cost Spanish banks alone last year 7,500 million euros, which shows that no sector has suffered as much from low rates as banking. According to Juan Abellán Marichalar, director of the Master’s in Finance and Digital Banking at IEB, these lower margins, coupled with ever-increasing capital requirements by the European Central Banks (ECB), are advancing a process of mergers and takeovers that will reduce the Spanish financial system to five or six brands. «The concentration process is the first great challenge that our banks have to take on. Entities are facing a difficult scenario because, on the one hand, the regulator is stricter in terms of capital requirements for European banks, which must compete with its North American counterpart, which rejects the Basel III agreements. On the other hand, the current policy of interest rates nullifies the profitability of the banks, which makes it practically impossible to improve the balance sheet via the income statement. The smaller ones will not be able to survive, mergers between them are insufficient, and the absorption of these entities by the three “big” ones implies capital needs that are difficult to satisfy in the current environment,” explains Abellán.

Aurelio García del Barrio, general secretary and director of the MBA specializing in Finance at IEB, also highlights the importance of concentration processes as key to recovering profitability ratios. “Although banks have focused on commission-generating businesses and have opted for strategies, such as marketing fixed-rate mortgages or selling insurance, investment funds and pension plans, the truth is that the measures seem insufficient. The expansion of low interest rate policies is leading the banking sector to a new round of mergers. It is the only way to continue being profitable”, assures García del Barrio.

Technology to the rescue

In this sense, technology becomes an opportunity for an industry that in Spain has always been one step ahead of its European competitors. The “fintech” are creating a variety of innovative services and products and banking has approached them. Thus, as reflected in the analysis, the data has become the future of the sector. «The big difference between bank data and that of the ”big tech”, such as Google, Amazon or Apple, lies in the fact that the information that banks have about what we buy, where we travel or our tastes is real and complete, while those of the ”big tech”, is approximate and, by no means, of the same quality. Hence, their interest in entering payment and collection services. The bank will have to find a way to make data a profitable, clear, transparent and non-invasive business”, highlights García del Barrio.

Banks are immersed in a transformation process that is leading them towards a digital model, in a process in which the relationship between banking and «fintech» has gone from competitive to collaborative. Miguel Ángel Barrios Tomás, deputy director of the IEB Digital Innovation and Fintech Management Program and head of Entelgy Digital, highlights in this environment the emergence of the so-called neobanks, one hundred percent digital entities, very oriented towards the “millennial” and “centennial” public. », and whose model must take into account the sector. «The market share of the neobanks is still not very relevant, but the trend and forecast of the analysts is that this could change in the medium term and, if the banks do not react adequately, they could lose a significant number of clients, mainly from the banking sector. retailer,” he says.

Restore reputation

Recovering the lost reputation is another of its challenges in the sector. To achieve this, they have a great asset: socially responsible banking. «The world of finance cannot remain oblivious to sustainability. The EU is perhaps the area of ​​the world that is most aware of a problem, in which it has also been involved, urging it to do its homework to solve this global challenge”, underlines Alberto Blanco, professor of the master’s degree in Stock Exchange and Financial Markets at IEB and CEO from biddail.

The United Nations summit, held last September in New York, has already established the principles of the financial sector in the face of the global threat. Thus, the entities assumed that “only in an inclusive society based on the dignity of people and the sustainable use of natural resources can their businesses and clients make sense”. And it is that, in this context, banks could hardly justify the financing of activities contrary to the care of our world. «Impact funds or investment with ESG or IRS criteria have ceased to be a niche for a conscientious few and, now, are a trend that will probably become ”mainstream” due to their growing unstoppable demand» White adds.

The new year has begun, twelve months ahead in which the sector will have to do a lot of homework.