By Kerril Burke, CEO of Meritsoft
Anyone long for a return to more benign economic times? A time when a rise in the base rate simply led to immediate benefits for savers.
Well, get prepared for a continued long wait, as last week’s decision from the Bank of England’s (BofE) signals anything but a move to more conventional times.
In fact this rise, albeit small, has much wider knock-on effects than simply “what does this mean for my mortgage repayments”? Similarly, it obviously increases the costs for anyone trading the capital markets in terms of funding. Even with interest rates at historically low levels, some of the biggest players have been losing double digit millions in unrecovered failed funding costs. And with more hikes down the road, there are further implications of the BofE rate increase for the cost of trading.
As of last Thursday, the cost of the fail funding of trades in Sterling shot up 50%. Therefore, any trader looking to borrow say one million to finance a trade, now faces an extra 0.25% per annum in funding costs. One of the main strategies traders use to minimise funding is by buying and selling for the same contractual settlement date. This means paying funds from the proceeds received from a transaction. Take the example of a trader selling Sainsbury’s stock in order to fund a purchase of Tesco shares, both for the same agreed settlement date. The trader expects the cash from Sainsbury’s trade in order to settle the Tesco transaction. There is just one small issue – he hasn’t received the money for his stake in Sainsbury’s. In this, let’s face it not untypical scenario, the only way to pay for the Tesco shares is to borrow the money. The trader in question, now has to take on an additional funding cost to borrow the funds to settle the Tesco trade. If the reason for the fail in the Sainsbury shares was due to the counterparty, it does not seem fair that they are forced to pay this additional cost does it?
But hey, perhaps it doesn’t cost much? The cost will obviously vary based on the amount of cash open and the length it is outstanding but it could run into USD thousands per trade! And the major trading firms can have thousands of securities, FX, equity and commodity derivatives fails everyday. This may have been hidden because rates have been and are largely still at record lows. But the trend and market sentiment is now unmistakably upwards. However, this is only part of the problem.
There are costs and capital for market participants in the wide range of receivables on their balance sheet. These balances, at least the ones in Sterling, are now half a percent more expensive to fund. So the cost of failing to settle these transactions are now far more than they would have been before the hike. A bank is now at a distinct disadvantage, particularly if they do not have a way to identify, optimise and recover where they are incurring funding and capital costs through no fault of their own. Essentially, by having receivable items open while waiting for money to come in, it will be borrowing cash to cover itself. If a trade fails to settle for say five days, then that is a whole week of extra funding costs that a bank needs to cough up. And not being able to track additional funding costs due to the late settlements is not the only issue. Many banks are still not even identifying the direct cost impact of a trade actually failing. If a bank can’t work out the cost implications of not receiving funds when a trade fails, then how on earth can they identify whether or not they can claim money back from their counterparties?
Trying to work out the many effects of the BofE’s latest monetary policy decision is difficult, but like those with a variable mortgage, trading desks are impacted. Late settlement means higher funding and higher rates means the additional funding costs more. Preparing now to handle the trading cost impact of this small rise and the upwards trend is exactly what’s needed to ensure banks are ahead of the curve whenever the BofE or other countries decide to hike rates again in the future.
A quarter of banking customers noted an improvement in customer service over lockdown, research shows
SAS research reveals that banks offered an improved customer experience during lockdown
This represents some good news for banks in an extremely challenging time, with 59% of customers also saying they’d pay more to buy or use products and services from any company that provided them with a good customer experience over lockdown.
The improvement in customer experience also coincides with a rise in the number of digital customers. Since the pandemic started, the number of banking customers using a digital service or app has grown by 11%, adding to an existing 58% who were already digital customers. Over half (53%) of new users plan to continue using these digital services permanently moving forward.
Brian Holden, Director, Financial Services at SAS UK & Ireland, said:
“It’s notable that in times of need customers value being able to communicate with their bank and place an even higher value on good customer service. A rise in the number of digital customers means banks can now reach a wider audience online, leveraging AI and analytics to offer a more personalised experience.
“There is work to be done, though. Even greater personalisation is needed if banks are to win over the 12% of customers who felt banking services deteriorated over lockdown. And this personalisation will need to get right down to a segment of one to properly reflect the unique circumstances some individuals now find themselves in due to the pandemic.”
While the number of digital users grew over lockdown, there is still a quarter (24%) of the banking customer base that have chosen not to make the switch to digital services.
Meanwhile, failure to offer a consistently satisfactory customer experience could prove costly for banks, with a third (33%) of customers claiming that they would ditch a company after just one poor experience. This number jumps to 90% for between one and five poor examples of customer service, so this just underlines how much retail banks can win or lose in these difficult times.
For more insight into how other industries across EMEA performed during lockdown, download the full report: Experience 2030: Has COVID-19 created a new kind of customer?
Swedish Bank Stress Tests in Line with Recent Rating Actions
The Swedish Financial Supervisory Authority’s (FSA) latest stress test results show major Swedish banks’ robust ability to absorb credit losses. The results support Fitch Ratings’ view that short-term risks have abated in recent months, and are in line with Fitch’s assessment of major Swedish banks’ capitalisation at ‘aa-‘, which was a factor when Fitch removed the ratings of Handelsbanken, Nordea (not covered by the FSA’s stress test) and SEB from Rating Watch Negative in September.
The FSA estimated about SEK130 billion of credit losses over 2020-2022 for the three largest banks (Swedbank, Handelsbanken and SEB) under its stress test. This represents about 220bp of their loans, or about 70bp annually. However, the banks’ pre-impairment profitability in the stress test could absorb credit losses of up to about 110bp of loans annually. Fitch’s baseline expectation is for credit losses below 20bp of loans in 2020 and 8bp-12bp in 2021.
Capital remained strong under the stress test. The average common equity Tier 1 (CET1) ratio fell by only 2.8pp (1.9pp if banks did not pay dividends) from 17.6% at end-June 2020. The capital decline was not driven by credit losses, which could be absorbed by pre-impairment profitability, but by risk-weighted asset inflation.
The three banks’ 3Q20 results showed that capital has been resilient despite the coronavirus crisis. The banks had a CET1 capital surplus over regulatory minimums, including buffers, of almost SEK100 billion (excluding about SEK33 billion earmarked for dividends). SEB had a CET1 ratio of 19.4% at end-September, Handelsbanken’s was 17.8% and Swedbank’s 16.8%.
The SEK130 billion credit losses under the latest stress test are lower than under the FSA’s spring 2020 stress test (SEK145 billion), which also covered a shorter period of two years. However, they are still larger than the actual losses incurred by the three banks during the 2008-2010 crisis. This is despite tightened underwriting standards by the three banks in recent years, including, in the case of SEB and Swedbank, in the Baltics, the source of most of their loan impairment charges in the previous crisis.
In its baseline economic forecasts, the FSA assumes a harsher shock to Sweden’s GDP in 2020 and 2021 (-6.9% and 1%, respectively) than Fitch’s baseline (-4% and 3.4%), although it assumes a similar recovery by end-2022. It also assumes real estate price corrections, which appears particularly conservative in light of a 11% housing property price increase over January to November 2020.
The ratings of Handelsbanken (AA), Nordea (AA-) and SEB (AA-) are on Negative Outlook due to medium-term risks to our baseline scenario. The rating of Swedbank (A+) is on Stable Outlook, reflecting significant headroom at the current rating level following a one-notch downgrade in April due to shortcomings in anti-money laundering risk controls.
Future success for banks will be driven by balancing physical and digital services
Digital acceleration due to COVID-19 has not eliminated the need for bank branches
Faster service (23%), smaller queues (26%) and longer opening hours (31%) are among customers’ biggest asks of their bank branch, new research from Diebold Nixdorf today reveals. But with 41% consumers saying they would be comfortable to engage with all banking services via an app, it is vital that banks respond to the full spectrum of customer needs – balancing and evolving their offerings on multiple fronts.
A third (35%) of customers say they will always want access to physical, in-branch banking services in some capacity and one in ten (10%) consumers will never bank predominantly online in the future. This demonstrates that there remains an important role for the services a branch provides. This role, however, continues to shift away from purely transactional banking:
A quarter (26%) value face-to-face advice when it comes to their banking needs
One in five (18%) seek advice on different products
17% want to speak to the staff or other customers.
Matt Phillips, Diebold Nixdorf vice president, head of financial services UK & Ireland, said: “The majority of banks have spent the last decade focusing on their digital strategies and investing in improving – or establishing – their online customer experience. However, the data shows that there is still an essential role for physical branches. Banks now increasingly face the challenge of continuing to provide customers with access to a range of physical and as well as digital services, giving them the flexibility to choose the best service for them at any given moment in time.”
When looking beyond the impact of COVID-19, planned branch visits by customers are expected to rebound to 28%, following a dip to 11% during lockdown. And when asked about the new services they’d like to see inside their bank, sixteen percent of respondents said more self-service machines would improve their in-branch experience.
Matt Phillips continues: “In a world that is fast evolving and where the future is digital, there’s no doubt that high street banks must, and are, responding to the needs of highly digital customers. But not every customer requirement is digital. There is still a strong need for physical bank branches and the interaction and services they offer, and striking this balance between physical and digital is where the industry must come together to provide solutions. For example, building a strong, leave-behind strategy is something we’re seeing across the board when banks have to close branches, ensuring customers have access to self-service machines to complete all their transactional needs.”
The Coming AI Revolution
By H.P Bunaes, CEO and founder of AI Powered Banking. There is a revolution in AI coming and it’s going...
Q&A with Joe Steele, Head of Workplace Technology at Starling Bank
In just under a year, many businesses had no choice but to go online and with digital transformation on the rise...
How financial services organisations are using data to underpin future growth
By John O’Keeffe, Director of Looker EMEA at Google Cloud In addition to the turmoil caused by the COVID-19 pandemic, a...
Three questions the financial services industry must answer in 2021
Xformative, a Mastercard Start Path recipient, shares what these questions mean for fintech partners and their innovations This year, fintechs...
A quarter of banking customers noted an improvement in customer service over lockdown, research shows
SAS research reveals that banks offered an improved customer experience during lockdown A quarter (27%) of banking customers noted an...
Is Digital Transformation the Key to Business Survival in the New World?
After a turbulent year, enterprises are returning to the prospect of a new world following an unprecedented pandemic. Around the...
Virtual communications: How to handle difficult workplace conversations online
Have potentially difficult conversation at work, like discussing a pay rise, explaining deadline delays or going through performance reviews are...
Black Friday payment data reveals rapid growth of ‘pay later’ methods like Klarna
Payment processor Mollie reveals the most popular payment methods for Black Friday Mollie, one of the fastest-growing payment service providers,...
Brand guidelines: the antidote to your business’ identity crisis
By Andrew Johnson, Creative Director and Co-Founder. How well do you really know your business? Do you know which derivative of your...
COVID-19 creates long and winding road for startups seeking investment
By Jayne Chan, Head of StartmeupHK, Invest Hong Kong Countless technology and other companies describe themselves as innovators, disruptors or...