Author: Daren Cox, CEO of Project Brokers
Modern financial Institutions are facing unprecedented challenges: the largest investment banks in Europe and the US have suffered double-digit falls in their fixed income, commodities and currencies (
) trading arms, just as increased regulation is forcing banks to hold onto more capital, resulting in reduced leverage and a significant squeeze on their return on equity.
As a result, the pressure to slash costs in UK banking operations has never been more intense. Most leading banks have responded to a need for operational efficiency by promising to reduce costs across the board with widespread job cuts and stricter rules on travel and entertainment expenditure. Many have announced they will not subsidise any holiday parties or other entertainment this year, and banks are now scrutinising even the smallest of expenses, with newspaper subscriptions and pot plants among the items up for review.
Of course, the ability to maintain a tight reign over direct and indirect expenses is an essential part of controlling costs. However, banks need to begin this process by understanding their expense patterns – past, present and future – in order to make the best and most effective decisions in this area.
Cutting costs can clearly be challenging for finance officers within investment banking operations, especially as smaller expenditure can often go unnoticed due to the disparity and magnitude of the different divisions within the organisation. CFOs across the banking sector are therefore looking to enhance both the visibility and transparency of their costs, so that they can make better-informed decisions as part of on-going spending reviews.
Problems arise, however, when it comes to interpreting this information, since this data is often stored across many different management systems that are non-conversant and incompatible, and which therefore hinder any efforts to produce useful analytics or gain any meaningful insights
This lack of visibility can cause serious problems for today’s CFOs and other financial decision-makers, as it often means that they only have access to headline costs, and therefore often can’t see where other savings could be made. The solution to this problem is not as difficult as it may seem, however. Banks simply need to take a more holistic view of their expenses so that they can make informed decisions that will allow them to cut the fat – but not the muscle – when trying to reduce costs.
To achieve this goal, banks will need to begin by making the invisible, visible by identifying previously unseen trends, connections and relationships between their expenses data instantly, so that lower-profile costs such as market data and telecom costs, travel and entertainment, and brokerage fees can all be identified, assessed and reduced.
For many banks, however, the format in which this expense data is reported makes this process extremely difficult, as many systems only provide decision-makers with access to top-level costs, and therefore makes it difficult to identify precisely where these more ‘granular’ savings could be made. As a result, many expense reports are often missing this vital information, and therefore provide an incomplete and misleading picture.
In order to address this issue, it’s important for banks to be able to extract and consolidate their expenses data from multiple vendors and sources, so that they can have a single view of this disparate information and therefore gain a comprehensive overview of each department’s expenses.
The good news is that new technology now makes it possible to extract and consolidate this type of expense data from multiple vendors and sources into a single ‘dashboard’. The result is a holistic overview of the data that empowers managers to accurately pinpoint any employees that are spending excessively, to effectively manage multiple vendors, and to expose anomalies and inaccuracies in their expense data.
It’s easy to see the benefits that this approach can deliver. By providing a single view of all expenses and comparing it against the latest cost centre structure in areas like client entertainment, travel, corporate services, mobile communications, enterprise infrastructure, market data and catering – along with details of the management structure and the final ledger – the visibility of this data can be greatly improved. As a result, recent studies have shown that banks can reduce their direct line expenses by as much as 20% by turning data into action in this way.
At the same time, data quality will also be better as a result of this more consolidated approach, since any inconsistencies and anomalies in reports can be investigated and corrected very quickly. Not only will this approach make it easier for the management team to see ‘the big picture’ when it comes to expenses, but they will also have the ability to drill down into granular detail in order to investigate and understand any exceptions. As a result, the time spent producing and amending reports for any particular month, division or item can be drastically reduced, accuracy can be improved, and key decision-makers can gain much-needed insight into how and where to reduce operating costs.
Without a doubt, cost-cutting campaigns are here to stay for the vast majority of UK banks. Cost reduction, however, is a different philosophy to cost efficiency. It is cost efficiency and value for money that should be the focal point any new initiatives in this area. In most cases, a lack of visibility is probably the biggest stumbling block in this regard, since trends in high-volume, low-cost spending will often go unnoticed as a result. By comparison, new ways of looking at this data can provide a much clearer understanding of an organisation’s expenditure, and therefore make it possible to reduce inefficiencies like policy breaches and to focus on the things that matter instead.
As such, decision-makers within the financial services sector can tighten their belts more effectively by keeping closer tabs on any unnecessary employee expenditure and maximising budgeting strategies and operational efficiency. To save money in the short, medium and long term, it will be important to define key objectives in these areas carefully, however. After all, most banks aren’t trying to remove their discretionary spend completely; they simply need to ensure that their funds are focussed on the areas that will have the highest impact on their clients, employees and the community.
UK might need negative rates if recovery disappoints – BoE’s Vlieghe
By David Milliken and William Schomberg
LONDON (Reuters) – The Bank of England might need to cut interest rates below zero later this year or in 2022 if a recovery in the economy disappoints, especially if there is persistent unemployment, policymaker Gertjan Vlieghe said on Friday.
Vlieghe said he thought the likeliest scenario was that the economy would recover strongly as forecast by the central bank earlier this month, meaning a further loosening of monetary policy would not be needed.
Data published on Friday suggested the economy had stabilised after a new COVID-19 lockdown hit retailers last month, while businesses and consumers are hopeful a fast vaccination campaign will spur a recovery.
Vlieghe said in a speech published by the BoE that there was a risk of lasting job market weakness hurting wages and prices.
“In such a scenario, I judge more monetary stimulus would be appropriate, and I would favour a negative Bank Rate as the tool to implement the stimulus,” he said.
“The time to implement it would be whenever the data, or the balance of risks around it, suggest that the recovery is falling short of fully eliminating economic slack, which might be later this year or into next year,” he added.
Vlieghe’s comments are similar to those of fellow policymaker Michael Saunders, who said on Thursday negative rates could be the BoE’s best tool in future.
Earlier this month the BoE gave British financial institutions six months to get ready for the possible introduction of negative interest rates, though it stressed that no decision had been taken on whether to implement them.
Investors saw the move as reducing the likelihood of the BoE following other central banks and adopting negative rates.
Some senior BoE policymakers, such as Deputy Governor Dave Ramsden, believe that adding to the central bank’s 875 billion pounds ($1.22 trillion) of government bond purchases remains the best way of boosting the economy if needed.
Vlieghe underscored the scale of the hit to Britain’s economy and said it was clear the country was not experiencing a V-shaped recovery, adding it was more like “something between a swoosh-shaped recovery and a W-shaped recovery.”
“I want to emphasise how far we still have to travel in this recovery,” he said, adding that it was “highly uncertain” how much of the pent-up savings amassed by households during the lockdowns would be spent.
By contrast, last week the BoE’s chief economist, Andy Haldane, likened the economy to a “coiled spring.”
Vlieghe also warned against raising interest rates if the economy appeared to be outperforming expectations.
“It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.
Higher interest rates were unlikely to be appropriate until 2023 or 2024, he said.
($1 = 0.7146 pounds)
(Reporting by David Milliken; Editing by William Schomberg)
UK economy shows signs of stabilisation after new lockdown hit
By William Schomberg and David Milliken
LONDON (Reuters) – Britain’s economy has stabilised after a new COVID-19 lockdown last month hit retailers, and business and consumers are hopeful the vaccination campaign will spur a recovery, data showed on Friday.
The IHS Markit/CIPS flash composite Purchasing Managers’ Index, a survey of businesses, suggested the economy was barely shrinking in the first half of February as companies adjusted to the latest restrictions.
A separate survey of households showed consumers at their most confident since the pandemic began.
Britain’s economy had its biggest slump in 300 years in 2020, when it contracted by 10%, and will shrink by 4% in the first three months of 2021, the Bank of England predicts.
The central bank expects a strong subsequent recovery because of the COVID-19 vaccination programme – though policymaker Gertjan Vlieghe said in a speech on Friday that the BoE could need to cut interest rates below zero later this year if unemployment stayed high.
Prime Minister Boris Johnson is due on Monday to announce the next steps in England’s lockdown but has said any easing of restrictions will be gradual.
Official data for January underscored the impact of the latest lockdown on retailers.
Retail sales volumes slumped by 8.2% from December, a much bigger fall than the 2.5% decrease forecast in a Reuters poll of economists, and the second largest on record.
“The only good thing about the current lockdown is that it’s no way near as bad for the economy as the first one,” Paul Dales, an economist at Capital Economics, said.
The smaller fall in retail sales than last April’s 18% plunge reflected growth in online shopping.
BORROWING SURGE SLOWED IN JANUARY
There was some better news for finance minister Rishi Sunak as he prepares to announce Britain’s next annual budget on March 3.
Though public sector borrowing of 8.8 billion pounds ($12.3 billion) was the first January deficit in a decade, it was much less than the 24.5 billion pounds forecast in a Reuters poll.
That took borrowing since the start of the financial year in April to 270.6 billion pounds, reflecting a surge in spending and tax cuts ordered by Sunak.
The figure does not count losses on government-backed loans which could add 30 billion pounds to the shortfall this year, but the deficit is likely to be smaller than official forecasts, the Institute for Fiscal Studies think tank said.
Sunak is expected to extend a costly wage subsidy programme, at least for the hardest-hit sectors, but he said the time for a reckoning would come.
“It’s right that once our economy begins to recover, we should look to return the public finances to a more sustainable footing and I’ll always be honest with the British people about how we will do this,” he said.
Some economists expect higher taxes sooner rather than later.
“Big tax rises eventually will have to be announced, with 2022 likely to be the worst year, so that they will be far from voters’ minds by the time of the next general election in May 2024,” Samuel Tombs, at Pantheon Macroeconomics, said.
Public debt rose to 2.115 trillion pounds, or 97.9% of gross domestic product – a percentage not seen since the early 1960s.
The PMI survey and a separate measure of manufacturing from the Confederation of British Industry, showing factory orders suffering the smallest hit in a year, gave Sunak some cause for optimism.
IHS Markit’s chief business economist, Chris Williamson, said the improvement in business expectations suggested the economy was “poised for recovery.”
However the PMI survey showed factory output in February grew at its slowest rate in nine months. Many firms reported extra costs and disruption to supply chains from new post-Brexit barriers to trade with the European Union since Jan. 1.
Vlieghe warned against over-interpreting any early signs of growth. “It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.
“We are experiencing something between a swoosh-shaped recovery and a W-shaped recovery. We are clearly not experiencing a V-shaped recovery.”
($1 = 0.7160 pounds)
(Editing by Angus MacSwan and Timothy Heritage)
Oil extends losses as Texas prepares to ramp up output
By Devika Krishna Kumar
NEW YORK (Reuters) – Oil prices fell for a second day on Friday, retreating further from recent highs as Texas energy companies began preparations to restart oil and gas fields shuttered by freezing weather.
Brent crude futures were down 33 cents, or 0.5%, at $63.60 a barrel by 11:06 a.m. (1606 GMT) U.S. West Texas Intermediate (WTI) crude futures fell 60 cents, or 1%, to $59.92.
This week, both benchmarks had climbed to the highest in more than a year.
“Price pullback thus far appears corrective and is slight within the context of this month’s major upside price acceleration,” said Jim Ritterbusch, president of Ritterbusch and Associates.
Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude production and 21 billion cubic feet of natural gas, analysts estimated.
Texas refiners halted about a fifth of the nation’s oil processing amid power outages and severe cold.
Companies were expected to prepare for production restarts on Friday as electric power and water services slowly resume, sources said.
“While much of the selling relates to a gradual resumption of power in the Gulf coast region ahead of a significant temperature warmup, the magnitude of this week’s loss of supply may require further discounting given much uncertainty regarding the extent and possible duration of lost output,” Ritterbusch said.
Oil fell despite a surprise drop in U.S. crude stockpiles in the week to Feb. 12, before the big freeze. Inventories fell by 7.3 million barrels to 461.8 million barrels, their lowest since March, the Energy Information Administration reported on Thursday. [EIA/S]
The United States on Thursday said it was ready to talk to Iran about returning to a 2015 agreement that aimed to prevent Tehran from acquiring nuclear weapons. Still, analysts did not expect near-term reversal of sanctions on Iran that were imposed by the previous U.S. administration.
“This breakthrough increases the probability that we may see Iran returning to the oil market soon, although there is much to be discussed and a new deal will not be a carbon-copy of the 2015 nuclear deal,” said StoneX analyst Kevin Solomon.
(Additional reporting by Ahmad Ghaddar in London and Roslan Khasawneh in Singapore and Sonali Paul in Melbourne; Editing by Jason Neely, David Goodman and David Gregorio)
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