2/20/2023 0 Comments Regional finance![]() ![]() Most regional banks need to take a hard look at where they can actually win, and prioritize those areas where they have a unique ability to compete. In fact, banks that have focused on building a segment niche or driving productivity in a disciplined way have been rewarded by the market with price-to-book ratios roughly 20 percent higher than those of their peers. ![]() Many banks pursue a community-oriented strategy, but our research suggests that community connection is not a major factor in determining where people bank, and the importance of local branch presence has been steadily declining. Most do not have a differentiated strategy that will win over time. ![]() The days of being all things to all people are over for most regional banks. Focus on where the bank has a “right to win” and optimize the rest Please email us at: our view, US regional banking leaders should focus on the following six areas as they shape their strategy and their response to potential mega bank dominance: 1. If you would like information about this content we will be happy to work with you. We strive to provide individuals with disabilities equal access to our website. Our “strategic control map” analysis of banking valuations in the US shows that the market expects a leading pack of regional banks to considerably outperform their larger peers over the next several years (Exhibit 2). Playing to their strengthsĭespite the challenging outlook, regional and mid-cap banks have meaningful strengths: close connections to customers, the ability to pursue high-value niche markets and segments, and relatively rapid decision-making. To do so, they will need to rethink their operating models with the aim of achieving efficiency ratios below 50 percent (with a clear path to continued reductions), significant and sustainable sources of low-cost funding, meaningfully better customer experience, a compelling talent value proposition, and a rapid and flexible approach to operational changes. These factors will continue to drive consolidation, and only the nimblest regional banks will survive intact. Many regional banks will need to continue investing substantially to manage risks effectively. Mega banks are leveraging their scale-both investment dollars and volume of customer data-to make significant investments and attract high-quality tech talent, increasing the gap between the leaders and laggards.įifth, a changing regulatory landscape could make select areas more challenging for smaller banks over time, particularly in the cybersecurity arena, which is likely to see increased focus from regulators. And the scope of use cases is likely to expand dramatically over the next ten years.įourth, the technology arms race continues to intensify, as large banks make substantial investments in technology and large tech platform firms start moving into financial services. Leading banks are experimenting with use cases such as AI-powered chatbots, deep learning for signature analysis in fraud management, and dynamic next-product-to-buy models. These investments will result in increasingly sophisticated customer experiences, including personalized interactions and tailored value propositions, as well as significant opportunities for efficiency through automation (our research indicates that about 23 percent of current work activities across sectors could be automated by 2030). Third, advanced analytics and artificial intelligence are becoming core differentiators, leading to lower costs and better customer experience delivery for players with the scale to make meaningful investments. Competition for each product in a customer’s wallet could ramp up, increasing price transparency and raising the potential for banks to be disintermediated and relegated to balance-sheet providers with low returns on equity. And digital disruption-led by attacker banks, fintechs, incumbents, and big tech firms -has progressed to the point where switching banks is easy for customers, giving them the power to unbundle their banking relationship. Second, consumer behaviors are changing, shaped by their experiences with leaders across industries. Add to that the threat of a recession and likely resultant credit losses. Growth is slowing, interest rates are declining-putting pressure on net interest margins-and there is significant geopolitical uncertainty. ![]() Please email us at: macroeconomic conditions are becoming more challenging worldwide. ![]()
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