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Oliver Wyman’s annual State of the Financial Services Industry report reviews the industry’s performance
and provides senior stakeholders with key insights for success.
Our findings are supported by Oliver Wyman’s deep financial services expertise and a number of
proprietary analyses, including:
An objective ranking of the world’s largest 400 quoted financial services firms based upon our
Shareholder Performance IndexSM (SPI)
Projected industry value growth and top management priorities for the coming year from our annual
CEO Survey
Note: Many of the names in this report are current and previous Oliver Wyman clients. Any statements
pertaining to such clients have been derived from publicly available information.
Financial
The intensive care provided by governments and central banks
services
helped most financial institutions survive the crisis of late 2008.
2010
They are now “in recovery”, preparing for life in an uncertain
economic and regulatory environment
Executive Summary
Following the failure of Lehman Brothers in late 2008, the
interbank lending markets seized up. It seemed possible that the
banking system would collapse. Governments intervened on an
unprecedented scale, providing financial institutions with over
US$1 TN in debt and equity capital. Most survived.
1. Intensive care
The intensive care phase of this recovery had two goals: to stop
the bleeding – that is, to prevent liquidity from draining out of the
banking system – and to keep the heart beating; that is, to keep
banks supplying each other and the real economy with credit.
These goals were achieved by extending deposit guarantees, even
including interbank deposits, and supplying financial institutions
with hundreds of billions of debt and equity capital. As a result, a
degree of “financial protectionism” has returned to the industry,
with governments attempting to trap deposits and credit in their
domestic markets.
2. Convalescence
3. Preparation
5. New lifestyle
The crisis has dealt a serious blow to the already poor reputation
of the financial services industry. Upon recovery, financial
institutions will need to demonstrate their healthy new lifestyle
not only to regulators but to consumers. Reputation will become
a more important competitive lever, and its management an
increasing concern for CEOs. Financial institutions will need to
take a more customer-centric approach to business, aiming to
provide customers with the financial outcomes they seek rather
than simply pushing products. The challenge is to be customer-
centric without becoming a charity. There is a risk that, between
consumer protection regulations and voluntary attempts to
appease customers, retail banking profits will be seriously eroded.
There had been warning signs, of course. By late 2006, the rate of
“early repayment defaults” on US subprime and no-doc loans had
elevated, and originate-to-distribute mortgage firms began to sell up
or shut down. In mid-2007, Countrywide, the largest US subprime
originator, became insolvent; Bear Stearns had to bail out two of its
hedge funds that had invested heavily in risky securities; and the
European Central Bank provided extra liquidity to the market.
500 90
Governments reduce
Pre-crisis Peak rates, but LIBOR
450 TED 25-50bps 464bps doesn’t fall until a 80
CDS 35-45bps 279bps few days later
400 VIX 10-20% 81% 70
350
60
300 Lehman weekend
50
250 Start of the
credit crunch 40
200
30
150
20
100
50 10
0 0
Dec 06
Feb 07
Apr 07
Jun 07
Aug 07
Oct 07
Dec 07
Feb 08
Apr 08
Jun 08
Aug 08
Oct 08
Dec 08
Feb 09
Apr 09
Jun 09
Aug 09
Oct 09
Dec 09
TED spread1 in bps CDX: IG CDS spreads in bps VIX: S&P annual volatility in %
As the crisis spread to the real economy, and almost all developed
economies went into recession, politicians rapidly returned to the
Keynesian ideas that they had apparently abandoned in the 1980s.
Not only did central banks drop interest rates to near zero (the
monetarist prescription), governments began “stimulating” their
economies with high levels of deficit spending. The US government,
like many others, is now running a deficit of over 10 per cent of GDP,
the highest since World War II.
70 30%
60
25%
50
20%
40
15%
30
10%
20
5%
10
0 0%
12/1/2004
6/1/2005
12/1/2005
6/1/2006
12/1/2006
6/1/2007
12/1/2007
6/1/2008
12/1/2008
6/1/2009
Global market capitalization FS market capitalization — FS share of global market capitalization
Of course, the story is not the same for everyone. Countries differ
in their exposure to the financial sector and, hence, in the impact
of the crisis on GDP and public finances. They also differ in how
quickly they have “taken the pain”. Variation in accounting rules,
and in the percentage of bank assets that are securities as opposed
to loans, mean that banks in some countries (notably the US) have
already recognized a greater portion of losses than have banks in
other countries.
3,000
166 2,810
1,015
2,500
2,000
604
1,500
1,025
1,000
500
0
US UK Rest of Europe Australia/Asia Total
% ultimate losses
63% 29% 34% 23%
recognized to date
Source: Ultimate writedowns from IMF’s October 2009 Global Financial Stability Report; losses to date
from Bloomberg, as of 06 January 2010.
80%
60%
40%
20%
0%
-20%
-40%
UK
Mexico
US
Russia
France
Turkey
Australia
Germany
Japan
South Africa
Canada
Brazil
Italy
China
South Korea
India
Argentina
Indonesia
80%
67%
59%
60%
54%
52%
50%
49%
46%
44%
41%
40%
39%
37%
35%
35%
40%
34%
33%
31%
30%
29%
29%
26%
25%
23%
23%
21%
20%
19%
19%
17%
17%
20%
12%
9%
8%
7%
7%
7%
0%
Japan
Italy
France
Germany
Canada
UK
India
Argentina
US
Turkey
Brazil
Mexico
South Africa
Indonesia
South Korea
Australia
China
Russia
2007 2009
1.2. Regulation
Financial services regulation is likely to be reformed in all
developed economies. Some reforms, such as Basel 3 (which will
modify and supplement Basel II) are already in development.
Nevertheless, financial institutions cannot be sure of the
regulatory regimes under which they will be operating in the
coming years. This uncertainty impedes strategic planning.
For now, the authorities are going easy on the banks, not only
providing them with a yield curve from which they can make profits
but sometimes slipping them “under the counter medicine”. It
emerged only in November 2009 that the Bank of England secretly
provided RBS and HBOS with emergency funding in the autumn of
2008. It is also emerging that some tax authorities around the globe
are being lenient with their collections from small- and medium-
sized businesses.
Having survived in 2009, for most financial institutions the next few
years will be devoted to recovery. As with recovery from medical
emergencies, the process can be broken into five stages.
Banks have also been saved by being grafted onto other financial
institutions, usually at the behest of governments offering
financial inducements. Thus we have seen the weak being taken
over by the able-bodied: Merrill Lynch by Bank of America and
HBOS by Lloyds TSB, for example.
Three main procedures have been used to keep the heart beating:
2,500
2,000
1,500
1,000
500
0
Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09
Note: Purchases, guarantees and insurance policies valued at total potential taxpayer exposure.
Source: Governments as shareholders: navigating the challenges of newly held interests in financial
institutions – World Economic Forum working paper in collaboration with Oliver Wyman, Grail
Research, Oliver Wyman analysis.
Canada UK
France
US Italy
Turkey Japan
China
South Korea
Mexico Saudi
Arabia
India
US government share of
Brazil
total FS assets has
increased to 10-15%
between pre- and post-
crisis period; majority South
Argentina Africa
government-owned
institutions are AIG,
Fannie Mae, Freddie Mac
Government ownsership Lower end Upper end
No data NA NA
None 0% 0%
Small 0% 10%
Moderate 10% 30%
Considerable 30% 50%
High 50% 100%
Source: World Economic Forum, World Bank Research on Bank Regulation and Supervision (2007
database, updated June 2008), Oliver Wyman analysis.
Note: Per cent of banking system’s assets in financial institutions with over 50% government ownership.
1 Source: Annual reports, websites, Oliver Wyman analysis based on a sample of more than 100
boards of financial institutions.
2 Often have deep functional capabilities in law, marketing, human resources and the like.
2.4. Rebuilding
Many boards are seeking comfort from a well-articulated recovery
plan. Senior managers are responding with remedies aimed at
making their businesses more resilient, typically by making them
cheaper to run, simpler and less risky.
1. Solvency
Regulatory topic Less Spectrum of regulation More Possible future action Implications Key cases
Gross leverage “Tangible leverage” “Tangible leverage“ Ensure “right-risking” Switzerland: Imposed
Leverage ratio
Absolute- ratio restrictions of ratio restrictions ratio restrictions with a diverse mix of less absolute leverage
leverage ratio restrictions at a
3-4%, for overseas based on local consolidated level based on harmonized and more risky activities restrictions for its major
operations only accounting rules IFRS-based valuation to achieve balance banks
Exclusion of hybrid
Exclusion of sub- securities
ordinated convertible Exclusion of deferred Match capital raising
debt from Tier 1 Tier 2 harmonized tax assets Tier
1 replaced with instrument to efficient US: State of California
Allowable capital and Tier 3 eliminated “Crisis Common frontier of regulatory ordered bank to raise
Higher levels of Tier 1 “Top up“ capital such Equity” decree and investor more common equity
capital relative to Tighter restrictions as contingent capital
on innovative Tier 1 preference
Tier 2
instruments
Source: Oliver Wyman
3. Compensation
Regulatory topic Less Spectrum of regulation More Possible future action Implications Key cases
UK: New financial
Stricter independence Greater involvement
Compensation Board oversight Linking risk oversight & Public disclosure of of compensation of risk function, more services pay rules to
governance comp. governance compensation committee transparency require disclosure of top
20 non-executive earners
Australia: Proposal
Structure of Alignment of that Boards can
Linking of bonus pool Linking individual
compensation Linking to firm-wide More consequential compensation to be sacked if two rounds
to enhanced risk- comp. to risk-adjusted
process results validation process strategy promoting right of compensation
adjusted metrics metrics and KPIs employee behaviors recommendations are
not accepted
US: Pay Tsar appointed
Setting of executive Compensation cap Alignment of control Linking of Potential for loss with remit to design
and risk-taker Stricter rules on on companies that function comp. levels compensation policies of talent to rival pay rules for execs at
compensation levels guaranteed bonuses received government with required calibre and levels to required companies/other companies receiving
aid of talent capital industries government aid
FSB: Proposals calling for
Legal clawbacks on Incentivizing longer-
Payout mechanisms Greater proportion of Deferral of bonus Deferred compensation 40-60% of bonuses to be
untruthfully inflated term and through-the-
payout in stock linked to risk horizon at risk of future results deferred for several years
earnings cycle good behaviors and subject to clawback
Background and implications
Diagnosis
of the role of compensation in the financial crisis has been overplayed, but it is an important transmission mechanism that Boards can oversee, top management can steer
and regulators can, and indeed have, introduced and implemented a variety of rules and principles on
Oliver Wyman expects to see institutions complying with the recent and emerging regulatory actions in two possible ways. Companies will either implement and adhere to the
regulatory requirements minimally, using leeway in interpretations and loopholes to ensure least disruption to the status quo. Or they will embrace regulation, be proactive and
embark on a full redesign in anticipation of longer term company benefits achieved through balanced, better controlled and more risk adjusted compensation schemes with the correct
incentivization of behaviors. Should future regulation remove or reduce “first-mover disadvantage”, we expect a greater number to embark on the latter option
Weanticipate future compensation regulation to involve making current proposals more concise, closing loopholes and increasing practical application rather than introducing new, or
changing existing principles. We also expect that compensation mechanisms for non-advised products will largely be self-regulated and consumer protection laws will be extended
Source: Oliver Wyman
Bifurcation between
Extended disclosure Fee-only
based fee-only independent
Constraints around Capped commission
Aligning incentives of advisor independent advisor channels and
soft incentives levels
remuneration remuneration commissioned in-house
channels
Adjustcarrying value Liquidity and
Reduced allowance Focuson through- of lending book via
Valuation of assets in Capped commission marketability of assets
illiquid markets to classify assets as the-cycle type market based risk
hold-to-maturity accounting measures levels measures, e.g. CDS explicitly considered as a
premium
spreads
Increased capital
Self-contained Capital
liquidity
requirements for Adoption of multi-
liquidity Broader controls “regulated” Taiwan: Banning of
Protecting domestic overseas lending domestic model with
requirements across all capital internationally – foreign funds from
tax payers Capital controls into standalone local entities
Delayed privatization investments Bretton Woods for investing into deposits
short-term portfolio and a global “brand”
and foreign entry bank capital
investments
Creation of
Lowering barriers for
Encourage sub-scale government/Post Public efforts to provide
consolidation large scale non-bank banks Costless
and UK: To grant licence for
Encouraging entities e.g. retailers choice unlikely to stem
competition automated bank creation of new bank –
Selectively lowering Restricted flight-to-quality in the
Facilitate bank account portability front runner is Virgin
barriers to entry participation in short term
account portability domestic asset sales
Supervision and
Harmonization of regulation of
regulatory principles Global
Supervision and multinationals FSB: Announced that
Named list of across EU harmonization
regulation of Establishment of dependent on extent to they will publish a named
multinational systematically crucial supervisory collages of regulatory
Establishment of which harmonization list of systematically
organizations players interpretation and
information sharing and global crucial players
implementation
standards implementation of
regulation is achieved
Deferred
Hong Kong, Singapore,
co‑ordinated
Priorexchange Retaliatoryactions Malaysia: Formed a
disengaging from
Withdrawal of of information Market-based to countries that regional tripartite
extraordinary Increased regional and
support mechanisms on planned exit exit from support don’t adhere working group to
depositor global coordination
strategies between mechanisms to coordinated co-ordinate exit from
protection policies
regulators programs current exceptional
compensation at risk guarantees
of future results
Source: Oliver Wyman
Maintain partial
International scrutiny Incremental capital government
charge for increasing Capital-rich buyers UK: Lloyds Banking
Regulatory ownership
Addressing “too big Curbs to growth for institution size/ benefit from expanded Group to be broken up
to fail” forbearance dialed implicit subsidies complexity Moral hazard tax cross-border growth in accordance with EC
back opportunities requirements
Living wills Forced break up Re-instating Glass-
Steagall act
Coverage of
Strengthening of “shadow” financial
Movement to risk- sector Robust supervision of
data collection Creationof a macro- based supervision risks across the whole
Regulatory coverage procedures/ Establishment
and interfaces prudential supervisor/ across banking, financial system to
more stringent regulator insurance, asset of registration, potentially reduce
data submission management reporting and severity of future crises
requirements oversight for hedge
funds
Creationof an
Increasingcapital independent body Reduced financial system Basel Committee:
Monitoring and
Implementation of a Limitations on Repo requirements at with the policy leverage to increase Proposal to introduce a
reducing leverage
build-up leverage ratio activity margin as leverage instruments to deal stability but lower volume-based leverage
increases with increasing industry RoE ratio
leverage levels
Mandated portfolio
Counter-cyclical diversification for
pro-cyclical assets, Contained excess credit Spain: Requires
Relief
from mark-to- capital requirements/
Mitigating Loan to value ratios markets growth and protection forward-looking loan
pro‑cyclicality market accounting loan loss provisions
rules at the asset level dependant economic
of banking sector from loss provisioning across
Encouragement system-wide risk banking sector
cycle back to DB/hybrid
retirement schemes
Source: Oliver Wyman
Source: Oliver Wyman.
More consolidation
Our analysis reveals that smaller and in-market acquisitions
produce the best results. The crisis has only increased the
advantages accruing to domestic scale – with implicit “too big to
fail” government guarantees, reduced unit compliance costs and
the de-globalization of funding – thereby reinforcing the in‑market
consolidation strategy. (Of course, this could be reversed by
regulatory measures aimed at discouraging banks from becoming
“too big to fail”.)
More diversification
An obvious approach to diversification is to apply a successful
domestic proposition in another country. This can be done well,
as demonstrated by banks such as HSBC, Santander and Standard
Chartered, but it is not easy. Our analysis suggests that geographic
diversification creates sustainable value in only two ways: by
reducing unit costs in the platform (Santander) or by increasing
risk diversification in the asset portfolio (HSBC).
60 40
50
30
40
30 20
20
10
10
0 0
2004 2005 2006 2007 2008 2009 2004 2005 2006 2007 2008 2009
Low
8% 2.2%
Mexico
Brazil 3.1%
5% South Korea South
Canada 9.4% Africa
6.9% 5.2%
5%
US UK
7.4% 6.7% Australia
6.7%
France Turkey
4.6% 3.3%
High
3% Japan
Argentina
5.8% Italy 4.7%
4.2%
Germany
3.5%
Higher share/slower growth Smaller share/slower growth
1%
x10 x2 x1 x0.5 x0.2
High Low
Relative contribution of global GDP
Legend
FS as a share of country-GDP: Size of the bubble (area) XX% FS as a share of
0-2% 2-4% 4-6% 6%+ represents the contribution national GDP (%)
to global G20-GDP
Source: Oliver Wyman.
1 Transparency 40%
2 Communication 18%
3 Better advice/service quality through improved field training 14%
4 Client first/adapt products to clients' needs 12%
5 Community/social responsibility 12%
Appropriate anticipation
of future developments
Skew to fast-growing
Pricing, products and markets/sectors
incentives
Level of transparency
Financial literacy
Capital growth and
development
dividend performance
Long Culture/values changes Community support met
term
Strong reputation
Source: Oliver Wyman.
Exhibit 17
Customer relative Customer base relative Country relative to
to benchmark to competitors economic peers
Retail What savings buffer What is the proportion of What is the population
targets suit you? a customer base who have savings rate?
a current savings buffer in
place?
Business What is the ideal level of What is the proportion of What is the level of
working capital for your businesses with a working GDP‑adjusted credit
business? capital plan in place? provided to the sector?
Life What proportion of What proportion of a What proportion of the
insurance my “human capital” is customer base have income population have income
insured? insurance or access via a protection in place?
current offer?
General What proportion of your What proportion of a What proportion of
insurance assets are insured? customer base are not owner-occupied houses are
under-insured? insured?
Wealth What investable assets do What proportion of a What proportion of the
you have for your age and customer base have a population will retire with
income band? current retirement plan their target income level?
in place?
Source: Oliver Wyman
Appropriate leverage
Offset
through the
mortgages
customer lifecycle
Customer
Worse for the customer
Source: Oliver Wyman.
800
600
400
200
Median=100
0
-200
-400
-600
-2,200
Payment processors
Insurance brokers
Asset managers
P&C insurance
Exchanges
Credit monolines
Life insurance
Banks
Latin America
Australasia
Asia
North America
Europe
All
200
Median=100
0
Legend
Maximum -200
Inter-quartile -600
range
Average -1,000
-1,400
Minimum
Retail & commercial
banks
Diversified financial
institutions
Investment banks
Universal banks
Latin America
Australasia
Asia
Europe
North America
Source: Oliver Wyman
analysis based on
shareholder performance
from the post‑crisis period
(August 07-December 09).
The full extent of household and commercial bad debt may not
have been faced in some (primarily European) economies. And
current governmental pressure on banks to stimulate economic
activity by making loans they do not deem worth the risk could
exacerbate future credit losses
Exhibit 20: Selection of cohorts across business lines and geographical footprint
Banking Insurance Wealth Utility/Other
All financials
Emerging market
Global
Major global
Global banking behemoths Global insurance giants
asset managers
Sophisticated insurance
Major capital market players Mid-tier asset managers Major exchanges
markets – major players
Major European
Major African banks Major Scandinavian banks
diversified insurers
Major Southeast
Asian banks
Major US universals
Major Australian banks Major Canadian banks American re-insurers US payment processors
Local
Regional
Cohort Top performer Most improved
Market Market
SPI SPI value SPI value
Rank Name average Name score $MM Name score $MM
1 Emerging market banking 236 Shanghai Pudong 282 28,054 Bradesco 210 26,407
behemoths – BRIC Development Bank
2 Major Latin American banks 189 Banco de Chile 223 7,407 Banco de Chile 223 7,407
3 Major Southeast Asian banks 188 CIMB Group 321 13,244 CIMB Group 321 13,244
4 Major African banks 149 African Bank Investments 175 3,254 RMB Holdings 125 4,860
5 Asian capital market players 138 CITIC Securities 284 30,855 CITIC Securities 284 30,855
6 Major North American P&C 119 Travelers Companies 176 27,242 Travelers Companies 176 27,242
insurers
7 Major Asia Pacific P&C 115 Samsung Fire & Marine 237 8,116 Samsung Fire & Marine 237 8,116
insurers Insurance Insurance
8 Major Scandinavian banks 109 Nordea Bank 154 41,148 Nordea Bank 154 41,148
9 European re-insurers 105 SCOR Group 159 4,623 Munich Re 155 30,834
10 Emerging Europe banking 103 Turkiye Garanti Bankasi 179 17,793 Turkiye Garanti Bankasi 179 17,793
titans
11 Major European diversified 99 Sampo Oyj 217 13,679 Prudential 139 26,168
insurers
12 Major Middle Eastern banks 94 Attijariwafa Bank 318 6,602 Turkiye Garanti Bankasi 179 17,793
13 Major European universals 89 Banco Santander 158 136,631 Banco Santander 158 136,631
14 Converged consolidated 86 Royal Bank of Canada 257 76,429 Commonwealth Bank of 223 75,682
sophisticated market players Australia
Local
Cohort Top performer Most improved
Market Market
SPI SPI value SPI value
Rank Name average Name score $MM Name score $MM
1 Major Chinese banks 250 Shanghai Pudong 282 28,054 China Construction Bank 281 193,276
Development Bank
2 Major Indian banks 221 Axis Bank 263 8,576 Axis Bank 263 8,576
3 Major Canadian banks 181 Royal Bank of Canada 257 76,429 Toronto-Dominion Bank 168 54,107
4 US payment processors 173 MasterCard 386 28,100 Fiserv 102 7,461
5 Major Australian banks 158 Commonwealth Bank of 223 75,682 National Australia Bank 86 51,639
Australia
6 Major Korean banks 152 Shinhan Financial Group 175 17,592 Industrial Bank of Korea 158 6,536
7 UK insurers 112 Admiral Group 356 5,117 Prudential 139 26,168
8 Major US P&C insurers 110 Travelers Companies 176 27,242 Progressive Corporation 69 12,129
9 American re-insurers 99 PartnerRe 156 5,950 Transatlantic Holdings 63 3,459
10 Major Italian banks 56 Intesa Sanpaolo 94 53,551 Unicredit 34 56,312
11 Major US life insurers 21 Aflac 105 21,640 Prudential Financial 56 22,989
12 Major Japanese banks -49 Shizuoka Bank 76 6,141 Shizuoka Bank 76 6,141
13 Major US universals -73 Goldman Sachs Group 158 86,798 Goldman Sachs Group 158 86,798
Note: For custom cohort analysis, contact your local Oliver Wyman office
Asia
SPI
2009
Lowest Median 100 Highest
Banks Insurance
brokers Asset
Credit monolines managers Exchanges
Sectors
P&C Payment
Life insurance
insurance processors
SPI
2009
Lowest Median 100 Highest
Oliver Wyman has created, and systematically Each calculation of the SPI is based on a five-year
tracks, a single performance index based on moving window of performance data of the top
publicly available data to create an objective 400 financial institutions worldwide, in terms
measure of volatility-adjusted shareholder value of market valuation at the end of the period.
performance specific to sectors and geographies. Consequently, the present index is calculated over
Since creating the Shareholder Performance the period January 2005 to December 2009.
IndexSM (SPI) in 1997, we have calculated
it annually as a performance benchmark This five-year window is designed to measure
for the world’s largest financial institutions. shareholder performance over the medium
Several features distinguish the SPI from term. As a result, SPI scores can be affected both
other performance based indices for financial by the inclusion of the past year’s data, and
institutions: the exclusion of data from over five years ago.
It is a measure of performance adjusted for
Changes in SPI from year-to-year do not solely
volatility using a Sharpe ratio. If two firms reflect performance in the last year – rather, they
have produced the same absolute return to reflect changes in a firm’s five-year medium-term
shareholders, the one whose returns are less performance. This measure of medium-term
volatile is ranked higher performance is complemented by the Post-Crisis
SPI, a score that is calculated over the period of
It covers all parts of the global financial
August 2007 to present, that forms the basis of our
services value chain
sector/geography Recovery Performance score.
Takeovers, mergers, spin-offs and currency
effects are explicitly captured and used to The first step in calculating the SPI is to compute
adjust raw performance data. A firm cannot the five-year Sharpe Ratio for a given institution:
move up the rankings simply by getting bigger
in a local currency Sharpe Ratio (firm) = Return (r*) / Risk (r*)
Where
r* = Monthly measurements of total merger
adjusted shareholder return net of the risk
free rate (Excess Returns)
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