The Bank of Canada is holding rates steady, but a flurry of economic concerns will likely keep pressure on many aspects of banking in 2020. As central bankers pay close attention to consumer spending, housing markets and business investment, Novantas has identified four key banking trends that require close monitoring by senior management this year.
- UNCERTAINTY: This will likely prove to be the broadest theme for 2020 as continued uncertainty about global macroeconomic conditions look to be pervasive. The Bank of Canada on Wednesday noted “a high degree of uncertainty” in the global economy, also citing the re-emergence of geopolitical tensions. If history proves a guide, many institutions will fall back on this uncertainty as a reason to curtail investment. As a result, the forecasting process will take on increased scrutiny, driving the need for forward-looking institutions to undertake rigorous scenario planning. Key questions that should be considered include:
- What are the decisions that can be made today that will hold up well under a wide range of scenarios?
- What are the key risks to our forecasts and how might we mitigate them at relatively low cost?
- PRESSURE ON EXPENSES AND RISK MANAGEMENT: In a time of uncertainty, financial institutions rightly focus on expense discipline and risk management. Numerous Canadian banks have announced significant efforts to reduce expenses, and Novantas expects this will continue through 2020. At a minimum, the optimization of expenses so that each dollar is spent wisely for the future will be the order of the day. Canada’s overall industry branch network continues to look unsustainably large given the shifts in customer preference and behavior. Novantas also expects to see continued focus on risk, with particular concerns about consumer-loan quality, in both secured and unsecured products. There appears to be no imminent crisis, but some signs are emerging that show that large debt burdens are affecting consumer purchase decisions.
- DEPOSIT COMPETITION: The pressure to grow low-cost deposits will remain in place even if the Bank of Canada keeps rates steady for much of the year. In fact, a flat rate environment poses some unique challenges. First, acquisition (promotional) rates tend to remain high. In the U.S., standard (portfolio) rates fell quickly when the Federal Reserve cut rates, but promotional rates declined far more gradually. As portfolio rates decrease, the gap with promotional rates widens, leading to continued churn. Second, many pricing tactics that are aimed to reduce costs are much more easily executed in a changing-rate environment, where a product or rate band can move with the market. When Bank of Canada rates are stable, banks may have less pricing flexibility because any changes are more visible. As a result, banks must optimize their rate strategies.
- INNOVATION: For a number of reasons, including regulatory stance and market composition, Canadian banking has historically seen less innovation than many global markets. Despite preferences shifting toward digital, online deposits make up a lower proportion of deposits than many other markets. Furthermore, fee-revenue strategies, particularly for chequing and credit card, remain unchallenged by new entrants. Based on observations from Europe, Australia and the U.S, Novantas sees the potential for disruption in Canada. Whether it comes from an external entrant or an existing player who develops a new proposition, senior management at financial institutions must develop contingency plans and decide whether to pursue a “first mover” advantage or plan to be a “fast follower.”