AS THE GAP BETWEEN WINNERS AND LOSERS CONTINUES TO WIDEN, BANKS FACE A ‘LAST CALL' TO CREATE A ROBUST COMPETITIVE ADVANTAGE

New research from Bain & Company finds banks need to define a strategic path by making deliberate choices

New York – Sept. 10, 2015 – In recent years, many banks navigated successfully through a ‘perfect storm' of industry dynamics.  Now, the longer-term implications of digitalization, disruptive competitors, sustained low growth, and increased regulations are coming into view.  Recent research from Bain & Company, The Return of Corporate Strategy in Banking, finds that the winners in this new era of banking are quickly pulling ahead of the losers: the gap in total shareholder return between the best and worst of the 20 largest banks worldwide has widened from a 5 percent standard deviation from the average return between 1993-2003 to 9 percent over the 2003-2013 period.  This scenario suggests banks are approaching the "last call" to create a robust competitive advantage, making a sound corporate strategy even more important to their long-term survival.   

Bain's analysis of 250 banks globally shows that only 1 in 9 are sustained value creators – defined as banks that outperformed the market on revenue and earnings growth over the 10-year period, while delivering total shareholder return greater than the cost of capital.  Of this number, 65 percent of banks are local or regional multi-category banks.  By contrast, only four percent of sustained value creators fit the global universal model – a result of slower economic growth, increasingly sophisticated local competitors and recent regulatory changes that have resulted in significant penalties for being global and universal. 

"A central issue for all banks today is deciding what kind of bank they want to be," said Niels Peder Nielsen, a partner in Bain's Financial Services Practice and co-author of the report. "For years, macroeconomic trends enabled global banks to extend their footprint without much regard for the potential drawbacks of complexity.  Now, many banks are reassessing the value of size and scope in an environment where the most successful institutions are actually making explicit decisions not to do certain things so they can excel at their core offerings."

According to Bain, the times demand that banks relearn strategy by throwing out the old strategic banking playbook, which took a resource-led approach to the portfolio, and adopting a more effective approach – one that defines decisions that can distinguish the bank in the eyes of consumer and allow the bank to beat competitors through cost leadership, superior customer service or other means.   

An effective strategy involves making deliberate choices in three areas:

1. What's your ambition? Setting a bank's ambition at the enterprise level involves articulating a vision that's both inspiring for employees and specific enough to enable choices as opposed to vague, feel-good aspirations.
2. Where should you play? Banks should determine how the business portfolio mix will look in terms of geographic focus, customer segments, product lines and parts of the value chain.
3. How to win? After deciding where to play, some banks jump right to tactical steps.  By contrast, most sustained value creators spend time identifying and investing in the few capabilities essential to realizing the strategy, while being "good enough" where it's sufficient.

"With market dynamics expanding the gap between winners and losers, banks have nowhere to hide," said Nielsen.  "The need to make strategic choices for long-term growth has become more urgent for banks than their leaders may realize, and the time to make those choices is now, or struggling banks will fall even further behind the pack."

Editor's Note: To schedule an interview with Mr. Nielsen, please contact Dan Pinkney at dan.pinkney@bain.com or +1 646 562 8108

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