At a London briefing on December 2, Isabelle Jenkins, banking and capital markets leader at the consultancy and auditing firm, said most of the largest retail and investment banks were not going far enough with their restructurings.
Jenkins did not name specific banks but said that, in some cases, cost-reduction targets needed to increase ten-fold.
She said: “Banks need to make big strategic changes and 70% of chief executive officers are making major cost [cutting] programmes to be implemented in 2017. But while they are targeting £100 million in reductions over two years, they really should [each] be taking £1 billion out of costs to make them a viable business.”
She added that banks have become unable to grow their revenue to cover their outgoings – due to regulatory changes and market conditions – while their cost of capital has not slumped far enough to become affordable.
“The kind of cost management they are going to need is not taking fewer cabs and business class flights,” said Jenkins, “It is an existential issue.”
Her comments chime with recent reports from the likes of McKinsey and EY, which called on banks to be bold with plans to reshape their businesses in an environement of weak profits, rising costs and ongoing market uncertainty.
Jenkins said banks’ cost-to-income ratios had reached 70% to 80%, while some capital markets divisions had seen this figure go beyond 100%. The amount raised in European equity capital markets by the end of November was at the lowest level in four years, according to Dealogic.
Both retail and investment banks will have to conduct front-to-back reviews of their processes and operations to see what their customers want, and where they make the most profit.
Jenkins said although Brexit had made an impact on banks’ outlooks and approaches, the fundamental changes that needed to be made were unrelated to the UK’s position within Europe.
However, Andrew Gray, UK regional financial services leader at PwC, said banks had been signing off budgets to get exploratory programmes for continued EU access going in the New Year. He said: “Expect to see licence applications to a number of European regulators in the first quarter of the year. Banks can submit as many licence applications as they like.”
But the likelihood of banks moving either people or operations to a large number of locations was low, Gray said, due to a loss of efficiency and investment needed to create or expand hubs outside of London.