Banking in 2022 - time to accelerate the pace of technology transformation

Making predictions for 2022 is particularly hard - these are highly uncertain times. But it is fair to say that under many of the economic scenarios, universal banks are likely to do well. The coming year is likely to favor integrated firms with the capacity to invest in technology and data to make the most of new growth opportunities. But they better get on with it - fast.

Investment banking performance will moderate

In 2020, investment banking was the shining star for universal banks as large provisions saw the profitability of lending businesses collapse. While those businesses have benefited from a decline in provisions this year, investment banking revenues have remained strong. In fact, revenues for the largest investment banks in 2021 may even eclipse those posted in 2020.

I don’t expect these heights to be reached again in 2022. Investment banks have greatly benefited from volatility-driven higher fixed income, currencies, and commodities (FICC) revenues; aggregate FICC revenue for the largest banks in 2020 was up more than US$30b from 2019. Market volatility is already declining and while we are unlikely to see a collapse back to 2019 revenue levels just yet, some shrinkage is likely. Other parts of the investment banking business are likely to see stability, especially with no imminent sign of inflection in equities markets, while there is still significant opportunity for the advisory business.

Corporate and consumer businesses will return as drivers of revenue

Banks are generally well-provisioned, even if asset quality deteriorates in the coming year. Provisions at European and APAC banks fell in 2021, while several US firms released provisions. The corporate, commercial and consumer banking divisions of large banks are already on track to deliver double-digit profitability this year, and a positive outlook for corporate profitability and defaults suggests this recovery will continue into 2022.

Another boost to deposit and lending businesses would be a rise in interest rates, a key driver of net interest income.

Unfortunately, expectations of a rise in rates are lowest in Europe, where the average net interest income of major European banks is around US$5b lower than when rates were last positive. But more broadly, many markets anticipate a rate rise in 2022. This would be a welcome boost to banks’ deposit income, but don’t expect to see an immediate impact on the top line. While deposit margins are likely to improve swiftly, many customers have taken the low-rate environment to lock in lower borrowing rates. For example, in the UK, most of the retail mortgage book is held at fixed rates, with a significant proportion of recent mortgages fixed for five years. In addition, loan demand is likely to remain sluggish until there is greater confidence in a sustained economic recovery.

Wealth management and private banking remain jewels in the crown

Many major banks have focused on building out their wealth management and private banking businesses. Not only have these divisions consistently delivered strong operating margins (above 20% in recent years), but the market is continuing to expand. The numbers of mass-affluent and high-net-worth individuals globally are forecast to grow by more than 40% between 2020 and 2025. Moreover, EY’s global wealth survey shows that a significant proportion of clients plan to move their portfolio to another wealth provider over the next three years. I expect wealth and private banking divisions to continue to be a strong performer in 2022, but firms will need to invest in their offerings as competition heats up.

Expect a continued focus on improving profitability

In recent years, especially in the low-interest-rate environment in Europe, cost reduction has been a central pillar of bank strategies to improve profitability. The cost agenda isn’t going anywhere, but I also anticipate greater emphasis on top-line growth in 2022 and beyond. Three areas of focus will be:

(1) Client centricity

Banks looking to grow their top line will need to invest in more personalized offerings and bring together a wider suite of services for their clients to win market share and share of wallet. EY surveys of wealth customers, retail banking customers and SMEs all highlight similar trends in client demand. Personal customers increasingly want a slick experience that integrates all their financial services across providers, but also brings together non-financial service offerings. Customers would like their principal financial provider, often a traditional bank, to be the one that does this. But if not, they increasingly put their trust in challengers. In the commercial space, banks need to focus on getting the basic experience right — streamlined processes and onboarding as well as faster credit decision-making. But where there is a real opportunity for growth is in value-added services - a battleground many new competitors have high aspirations and many traditional banks are on the defense.

(2) Climate and sustainability

Climate risk was highlighted as the top risk for bank boards over the next five years by the EY/IIF global bank risk management survey. This is an opportunity as well. Not only is US$7t in financing needed annually to meet climate and development objectives, according to the OECD, but clients are increasingly demanding sustainability solutions. For example, EY’s SME survey shows that nearly 60% of SMEs are interested in their bank helping them develop sustainable business models, and 20% would be willing to pay a fee for this service. Wealthy clients are increasingly looking at positive screening and impact investing as part of their investment strategies.

(3) Digital assets

Crypto markets have expanded beyond bitcoin, and the market capitalization of such assets has increased dramatically over the past year. Some banks take a conservative view of the viability of such assets, and they are certainly coming under increased regulatory scrutiny. Nevertheless, the digital asset landscape will continue to evolve, and their utility in financial services is unlikely to be defined by one cryptocurrency alone. Increased demand from clients will continue to drive banks and other financial service providers to offer digital asset services, from custody to investments and payments. The coming year is likely to see banks continue to explore ways to offer their clients access to this new asset class.

Technology transformation will be the great divide

Tapping into these growth opportunities demands significant investment in technology. Typically, around 20% of a large bank’s operating expense goes to technology. For the largest US banks, this equates to an average technology spend in excess of US$7b. For the largest European firms, this is a little over US$3b. European banks also, generally, spend a smaller share of this budget on new investments than their US counterparts.

Banks continue to deliver the cash flow to invest in transforming their technology and data. The biggest question for 2022 and beyond is whether they spend it well. Do they have the leadership and the talent to spend it in the right domains and to execute efficiently at pace? If they don’t, they will be caught on the wrong side of the great technology divide.

There are exciting opportunities ahead but making the most of them will require embracing change. I look forward to collaborating with our clients in 2022 to make that change happen.

Happy Holidays

Disclaimer: The views reflected in this article are the author’s and do not necessarily reflect the views of the global EY organization or its member firms.

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