banking review 2011

8/2/2019 Banking Review 2011

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Banking review: Seeing beyond 2011Getting the balance back


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Contents

True stability results when presumed order andpresumed disorder are balanced. A truly stablesystem expects the unexpected, is prepared to be

disrupted, waits to be transormedTom Robbins (American Novelist. b.1936)

Foreword ...............................................................................................................................1Executive summary ...............................................................................................................2

Adapting to new regulations ................................................................................................4

Rise o the value driven bank ................................................................................................12

Data management the starting point and golden thread ...................................................13

Mobile payments at the tipping point ...................................................................................16

Expanding into growing Arican markets..............................................................................18

Prepared or 2012? ...............................................................................................................21

Contacts and acknowledgments ........................................................................................... 22


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1 Banking review Getting the balance back

Foreword

It is somewhat axiomatic to observe that the banking industry locally and globally is undergoing a period o great

change. The expectation or SA banks is a continued period o low returns with a ocus on cost reduction and

meeting the ongoing requirements or new and ever more rigorous regulatory change.

We believe that the current business climate in South Arica, though still tough, is also showing signs o recovery.

So whilst we should not expect miracles and growth or local banks this year might not be at the levels seenprior to the economic crisis, Deloitte is o the view that 2011 is a year or banks to regain balance. They certainly

cannot go into hibernation until the dicult times are over, nor can they aord to allow the current environment

to orce them into an overly internal ocus. For example, it would be short-sighted to ocus attention only on cost

cutting without gearing up to be able to take advantage o opportunities when the markets shit.

Banks need to use this time to reassess and change the way in which they manage their data in order to truly

understand all their stakeholders and to use their data to build a competitive advantage. Attention should also

be ocused on balancing their eorts between cost optimisation, complying with regulation and identiying

uture growth opportunities in 2011. All this in an eort to bridge the gap between their response to the current

environment and where they need to be by 2012.

In the ollowing pages, Deloitte SA has identied several key areas o ocus that banks may wish to consider

in 2011. I should like to thank my colleagues who have contributed to this publication and whose names and

contact details are listed on the last page.

Kind Regards

Roger Verster

Partner | Financial Services Industry Country Leader


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2

Executive summary

As South Arican banks nd themselves in a more

regulated global economy with a higher emphasis

on risk consciousness and increased stakeholder

interest, they need to prepare or these conditions and

like leading institutions around the world, respond

proactively to these market shits.

We perceive 2011 to be the year or banks to regain

balance. In an eort to bridge the gap between what

local banks are currently acing and where they need

to be heading by 2012, Deloitte has set out its view o

the key imperatives banks need to tackle in order or

them to remain competitive and prepared or 2012.

Some o the primary considerations include:

Adaptingtonewregulations

In the past it was possible to view many o the

regulatory requirements as a box-ticking exercise

that was oten let as an ater-thought once key

business decisions had been made. However, that has

changed and the impact o the regulatory changes

are now central to a banks strategy as they will

potentially inorm decisions about products, clients

and even countries in which the banks may wish

to operate. Currently there is signicant regulatoryactivity underway, which will aect banks, including

the revision o the Basel Accord (commonly known

as Basel III), accounting standards relating to nancial

instruments (IFRS 9) and the risk and capital standards

or insurers (Solvency II), which will aect any

bancassurance groups. New proposed regulations

in the orm o carbon tax, executive remuneration

and new labour legislation are also on the horizon.

Banks will need to understand the business impact o

these new regulations quickly in order to realign their

strategy and operations where required.

Riseofthevaluedrivenbank

There has been much written around value based

management and the need or a ramework

to acilitate value based decision making has

perhaps never been greater. A proper value based

management ramework should uniy businessneeds or constant improvement and growth

with the ability to manage risk and stress a banks

portolio. A risk reward culture needs to be deeply

embedded at all levels and this can only be achieved

through extensive consultation and training.

Datamanagementthestartingpointandthe

golden thread

Despite an increased ocus on systems and data,

it is our view that by and large inormation anddata systems are still not suciently aligned.

Consequently banks are still aced with the challenge

o redundant (and even conficting) data housed in

still largely separate data environments. In addition,

the available data may lack sucient granularity and

its quality may be uncertain. A recent global Deloitte

risk management survey ound that almost hal the

nancial services executives surveyed, cited a lack o

alignment among inormation systems as a majorconcern. We believe this is also a valid concern in

South Arica. These concerns over the ragmented

nature o bank systems and the availability and

quality o data obtained rom these systems is not

new and banks will need to ocus on resolving this

in 2011.


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Mobilepaymentsatthetippingpoint

Mobile banking gives banks the potential to expand

beyond their geographical ootprint as well as the

ability to cross sell and up-sell products to existing

customers. Banks that harness these additional

mobile nancial services capabilities can see aproound impact on the nature o the banking

relationship. Unlike supermarkets, department stores

and other businesses that see only one dimension o

consumers spending habits, banks have a broader

view o what their customers buy and where they

like to shop. This puts banks in a prime position to

develop a new line o business ocused on bundling

data analytics or retailers and other entities vying

or customer intelligence while maintaining

the privacy o individual customers inormation.Banks could also use the knowledge o their core

customers to strengthen their own abilities to acquire

new customers, cross-sell to existing customers,

improve decisioning capabilities and provide better

customer service resulting in signicant value

streams or banks.

ExpandingintogrowingAfricanmarkets

Given the expected GDP growth and signicantchange in consumer expenditure patterns o other

Arican economies (in addition to the well publicised

corporate, resource and trade related opportunities),

bank subsidiaries in Arica are increasingly likely

to oer greater returns on new investments than

local operations. In this ast changing environment,

managing the investment decision-making process

eectively, as well as maximising delivery capabilities

and eciencies, will position banks well or the

opportunities to come.


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4

Adapting to new

regulationsWhere banks are at and where they are heading

The nancial crisis has provided the impetus or a

undamental re-look at regulation across the nancial

services industry and at accounting standards.

Currently there is signicant regulatory activityunderway, which will aect banks, primarily:

TherevisionoftheBaselAccord(commonlyknown

as Basel III)

Therevisionofaccountingstandardsrelatingto

nancial instruments (IFRS 9)

Therevisionoftheriskandcapitalstandards

or insurers (Solvency II), which will aect any

bancassurance groups

ExpecteddiscussionpapersfromNationalTreasury

and the eventual promulgation o the nancialMarkets Bill.

Although none o the changes stemming rom these

regulatory initiatives are due to take ull eect in 2011,

it is important to consider that:

The proposals are a moving target

Standard-settingbodiesintheUSandEurope

are currently debating the principles o theproposed reorms. Thereore, banks should be

vigilant or urther changes proposed during the

course o 2011 and should consider their operating

model consequences

The associated timelines are short

CertainelementsofBaselIIIgo-livein2012and

IFRS 9 must be implemented rom 2013. In order

to have implemented the required models and

operating model changes and to have ully tested

these changes, banks will have to begin their

implementation programmes in 2011.

Apart rom the existing regulations currently being

imposed, banks are in or another turbulent ride as

they begin to consider new proposed regulations in the

orm o carbon tax, executive remuneration and new

labour legislation.

What actions must banks take with regards to

regulation in 2011?

Key areas of Basel III (and related regulation) that

banks should be focusing on.

The 1 January 2012 implementation or the revised

market risk requirements puts pressure on banks

to ully test their models, processes and data and

understand the impacts that signicant increases in

market risk capital will have on nancial markets.Thereore, banks unding desks should ormulate a

strategy now or taking advantage o the relaxation o

Regulation 28 relating to the spread requirements or

pension und assets to enable banks to extend their

unding well beore the 2018 implementation o the

Net Stable Funding Ratio.

The 1 January 2012 implementation o the Financial

Stability Boards Principles o Sound CompensationPractice may require banks to renegotiate key senior

management compensation arrangements during

2011, ocusing particularly on increasing the risk-

sensitivity o compensation or all risk types, and

incorporating compensation deerral and claw-back

arrangements.


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As inputs into the Liquidity Coverage Ratio and the

countercyclical capital buer calculations, banks

sectoral and geographic data will assume a new

prominence. Banks need to thereore begin to examine

the quality o this data, how it is managed and used

(reer also to data management the starting pointand the golden thread on page 13).

There are some areas o Basel III where the impact on

South Arica is only likely to become evident during

2011 but may require rapid reaction by the banks.

Banks need to watch and be aware o the ollowing:

AsaG20country,SouthAfricaispartytotheG20s

commitment to trade standardised over-the-counter

derivatives contracts through exchanges or electronictrading platorms and clear them through centralised

counterparties by the end o 2012. Although there

will be a capital saving or our banks, the economics

o the inrastructure development is unknown and its

operational impact signicant

Newlegislationisexpectedtoregulatehedgefunds

in South Arica

AttheendofFebruary2011NationalTreasuryissued

a policy document called A saer nancial sector toserve South Arica better which sets out governments

proposals to ensure a stable nancial services sector.

This document deals with issues such as:

Financialstability

Consumerprotectionandnancialinclusionand,

amongst other recommendations, makes provision

or a new Financial Stability Oversight Committee,

as well as a Council o Financial Regulators

ThisbroadensthestructureoftheFSBtoincludea

banking services market conduct regulator. These

and other proposals will be the subject o new

legislation during 2011

Similarly,theactivitiesofcreditratingsagencies

and use o their ratings is likely to be impacted bythe Credit Rating Services Bill.

The Consumer Protection Act could impact

Basel III compliance

The Consumer Protection Act (CPA) becomes eectiveon 1 April 2011. It applies to the provision o bankingservices to any natural person, or juristic persons withan asset value or turnover under a threshold which isstill to be determined by the Regulator. Retail deposit-

taking activities naturally all within the ambit obanking services unless the bank can prove that theyare subject to the Financial Advisory and IntermediaryServices Act, 2002 (FAIS). This may be dicult toprove, as FAIS covers the giving o advice, rather thanthe provision o the deposit itsel.

Should the CPA apply to retail deposit-taking, it entitleseither the bank or the depositor to terminate any xeddeposit contract with 20 days notice, at any stage

rom origination until the contractual terminationdate. Under Basel IIIs Liquidity Coverage Ratio, xeddeposits subject to the CPA are likely to be deemed tomature within the prescribed 30 day stress scenariobecause o the embedded option. As a result theywill attract more onerous withdrawal assumptionsunder Basel III, requiring banks to hold more liquidassets. This exacerbates the diculty already acedby local banks to signicantly increase their statutoryliquid asset portolios (up to a 35% increase is likely

to be required under Basel III), with knock-on adverseimpacts on protability.

Under Basel IIIs Liquidity Coverage Ratio, xed deposits subjectto the CPA are likely to be deemed to mature within the prescribed

30 day stress scenario because o the embedded option


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6

Preparation will be required for banks to position

themselves for the anticipated implementation of

IFRS 9

A number o impairment models are currently being

discussed in anticipation o the release o the revised

exposure drat in the 1

st

quarter o 2011. The revisionis expected to address operational challenges raised

on the initial exposure drat. However, the expected

implications o the revision will possibly require banks to

separately manage the good and bad portions o

their loan books. Practically, the movement to expected

loss impairment will necessitate a re-calibration o

existing impairment models which will require system

changes, to cater or a orward looking assessment

o asset perormance. This is likely to create great

implementation complexities and data implications inachieving compliance with the requirements o the new

pronouncement when it becomes eective.

The intention behind the revision o hedge accounting

is to relax the stringent rule-based requirements

and to allow or a more principle-based application.

The suggested changes are designed with a view

to enhancing reporting transparency through

an alignment o hedge accounting with the riskmanagement policies and practices o the business.

The eectiveness o the hedging relationship will

thereore be determined by a qualitative assessment

o the hedging instruments ability to mitigate the

risk exposure or which it was entered into, in terms

o the management practices o the business. The

complexities that are likely to arise will relate to the

ability o management to provide well structured

justication or its decision to enter into a particular

hedging transaction. Thereore, in anticipation oadopting the new requirements, an assessment o all

hedging relationships will be required in the next year.


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Thorough understanding of what is expected

of bancassurance groups as a result of the

implementation of Solvency II is needed

With the implementation date or Solvency Assessment

and Management (the South Arican adaptation o

Solvency II) expected to be 1 January 2014, SouthArican banks involved in bancassurance activities

should be preparing or compliance over the

forthcomingmonths.BasedontheEUsexperience

with Solvency II some o the key areas likely to be

impacted as a result o Solvency II include:

Industry proftability and returns

It is anticipated that quality o earnings will

improve due to:

MoreaccuratepricingofriskacrossproductsWithdrawaloramendmentofundulyrisky

products

Although companies might not be required to raise

additional capital to address Solvency II requirements,

there is an expectation o higher capital buers since

balance sheets will tend to be more volatile under

Solvency II.

Consequences on valuations o insurers (i.e. how

the investment community regards them)

Increased quality o earnings and a ocus on Capital

lite products will likely be oset by companies

maintaining higher capital buers than beore. It

is expected that improved risk management within

companies could lower their risk premium and this

might impact positively on their share price.

Industry structures

Solvency II encourages diversication o risk. As such,

we expect to see accelerating corporate action once

the nal rules become clearer. We see this taking

several orms:

Smallercompaniesjoiningforces

Biginsurerstakingoversmalleronesthatareata

competitive disadvantage due to disproportionate

capital needs

Insurerslookingtodisposeofnon-core,capital-

intensive back-books

Wecouldalsoseecompaniesdiversifyingtheir

risks through internal product or geographical

growth o their businesses.

Assets held by insurersWe anticipate that insurers will continue to own risk

assets, though we would not oresee an increase in risk

appetite rom current levels.


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8

Government lobbying and a company-wide strategy

relating to sustainability and climate change

legislation needs to be devised and implemented

The South Arican National Treasury has been

considering placing a price on carbon or some time.

One o the mechanisms to put a price on carbon is

to use either a carbon tax or a market mechanism

such as a cap and trade (carbon credit) system. In

December 2010, they released a discussion paper on

carbon tax. I government chooses to implement a

carbon tax, more than R300 million per annum will

be collected rom the banking and insurance sector

directly (Calculated using inormation rom the Carbon

Disclosure Project 2010).

The impact o carbon tax on the economy will besignicant and, as a result, a lower rate may be used.

A carbon tax would either be implemented on carbon

emissions directly or on ossil uel prices. I levied on

ossil uels, a tax rate o R165 per ton CO2 would have

the ollowing eect:

ThepriceofelectricitycouldincreasebyR165per

MWh and Government could collect R34 billion per

annumfrombusinesses(BasedonEskoms2010Annual Report)

ThepriceofdieselcouldincreasebyR434perkland

Government could collect R1 billion per annum rom

dieselsales(BasedonEconexdieselconsumption

gures or 2009)

ThepriceofpetrolcouldincreasebyR381perkl

and Government could collect R955 million per

annumfrompetrolsales(BasedonEconexpetrol

consumption gures or 2009).

Apart rom the direct impacts o a carbon tax on the

sector itsel due to its own carbon emissions, the

banking and insurance sector needs to be concerned

with the exposure to a carbon tax on its investment

and nance portolios. It will have to be actored into

business case assessments going orward and also the

impact on the viability o businesses currently nanced.

This tax would have to be built into uture risk analysis

o new and existing investments. With these large

numbers in mind, it is important that the industry

understands the implications o a carbon tax with

National Treasury.

How much carbon tax will banks be expected to pay?

Assumptions:

- An initial carbon tax o R165 was assumed. This is based on the tax rate given in the IntegratedResource Plan 2010.

- The South Arican emissions o the companies are rom the Carbon Disclosure Project 2010.

- Scope 1 emissions are direct emissions released primarily as a result o the combustion o ossil

uels on site. For example the combustion o d iesel on site generators or the combustion o

coal in boilers on site.

- Scope 2 emissions are energy indirect emissions and are emissions associated with the use o

purchased grid electricity.

-Thescope1emissionsofEskomareeffectivelythescope2emissionsofthecompanies.Including

thescope2emissionsofcompaniesandthescope1emissionsofEskomislikedoublecounting

FinancialInstitution

Scope 1(Rand per annum)

Scope 2(Rand per annum)

Total(Rand per annum)

Nedbank 70,785 27,679,410 27,750,195

Standard Bank 1,696,860 22,917,510 24,614,370

First National Bank 4,135,395 61,250,970 65,386,365

ABSA 3,952,905 60,208,665 64,161,570

Investec 204,105 5,260,365 5,464,470


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Banks will need to get a handle on new executive

remuneration practices

2010 witnessed governance in banking remuneration

gathering urther momentum rom that which was

initiated in the atermath o the global nancial crisis.

This was particularly evident in the work undertaken

through the Basel Committee on banking supervision

which published a number o guidelines and working

papers on issues o risk management, supervisory

oversight and executive remuneration. In South

Arica this resulted in a number o submissions by

South Arican banking institutions in order or the

South Arican Reserve Bank (SARB) to assess the

level o compliance with these guidelines and

governance rameworks.

We anticipate that during 2011 this trend will continue

as regulators around the world seek to ensure that

the guidelines are implemented with greater levels o

compliance. We urther anticipate that the SARB will

need to provide guidance on the standards which will

beapplicableinaSouthAfricancontext.TheEuropean

Union has stipulated certain ranges and guidelines or

awardsanddeferralwhichmanyEuropeancountries

will seek to enorce, but translation o these into a SouthArican context has yet to occur. South Arican banks

have not required the bailouts witnessed in USA and UK

and thus we anticipate, in the light o the very dierent

banking landscape in South Arica, that many o the

Europeanstandardsregardingexecutiveremunerationwill

need to be modied to suit South Arica.

Finally, we expect that shareholder activism regarding

executive remuneration will continue to increase and

that the ollowing issues will be hot topics which

will require attention rom not only the leading

banking institutions in South Arica but all major listed

corporates during 2011:

Theneedforevergreaterandclearerdisclosure

on executive remuneration in line with the

recommendations o the King III principles and the

disclosurewitnessedinEuropean,particularlytheUK,

major nancial institutions

Theneedforgreatertransparencyonthedrivers

behind all orms o variable remuneration awards

(both cash and share based) with shareholders

wanting to be assured o a clear link between

perormance and the award o remunerationInbankinginparticular,theneedforindependent

and prudent risk metrics to be incorporated in a clear

and transparent manner into the award o bonuses

Thatovertimeshareholdersseeclearevidence

o clawbacks or oreiture occurring as intended

through the deerral mechanisms

Thatprudenceinexecutiveremunerationneedsto

be demonstrated i the recovery in banking ortunes

begins to gather momentum during 2011 andbusiness results are thus anticipated to improve rom

2011 onwards, particularly with what transpires

regarding employment and wage increases or

unionised employees during 2011.


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10

Labour amendments on atypical employment in

South Africa will have consequences

Many employers including employers in the banking

institutions make use o atypical employment. Some

businesses have been employing employees on xed

term contracts or using the services o a labour broker

so as to avoid the risks associated with employing

employees on a permanent basis. Drat amendments

to the Labour Relations Act (LRA), the basic conditions

ofEmploymentActandtheEmploymentEquity

Act, and a new piece o proposed legislation - the

PublicEmploymentServicesBillwerepublishedinthe

Government Gazette on 17 December 2010. Final

comments were provided on the amendments and the

new bill by all stakeholders by 17 February 2011. It is

clear that the amendments are meant to respond to thegrowth o atypical employment in South Arica. The

most signicant eect o these amendments relates to

labour broking arrangements and xed term contracts

which may have some impact on banking institutions.

The repeal o section 198 o the LRA will see that labour

broker clients (employers) have to directly employ

workers, thereby incurring administrative and other

costs. The labour broker will also now be liable or anyunair dismissal or unair labour practice claim that an

employee may bring, while in the past, the employee

could only hold the labour broker liable or these types

o claims and not the client company. As a consequence

o the proposed changes, the risk is that employers will

not be willing to incur the costs and risks o directly

employing an employee and thereore those employed

through labour brokers will lose their jobs.

Furthermore, i these proposed amendments do

become law, all employers including employers in the

banking institutions who use xed term contracts,

will have to be extremely cautious and wary when

employing employees on xed-term or short-term

contracts. Unless the employer has a reasonable

justication or employing the employee on a xed

term contract, it should not, as the employee may

well have an expectation or permanent employment

against the employer. This will be one o the

consequences i the proposed amendments are passed

into law. Another consequence o the proposed

amendments relates to section 32 (5) o the Basic

ConditionsofEmploymentAct,whicheffectivelystates

that employers must contribute benets o similar

or equal value to employees employed on a xedterm contract as the benets aorded to permanent

employees. However, it is important to note that

benets are not dened in the Act so we are not

clear as to what benets this proposed amendment

reers to. The proposed amendments especially in

relation to labour broking in South Arica seem to be

going too ar and may aggravate rather than alleviate

unemployment. The consequences or both employees

and employers will be ar reaching and will necessitatea huge change in the way employers contract with

employees, i these amendments are to become law.

The proposed amendments especially in relation to labour brokingin South Arica seem to be going too ar and may aggravate rather

than alleviate unemployment


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12

Rise o the value driven bank

Banks have a growing need or value based

management

There has been much written around value based

management in terms o the need or a ramework

to acilitate value based decision making, which has

largely been driven by:

Customeraffordability,particularlyinthemortgage

sector, is at an all time low, negatively impacting on

new business volumes

Regulatoryconcernsregardingglobalnancialstability

have resulted in an increased cost o capital (Basel III)

and higher administrative burdens on banks

Politiciansandconsumerjournalistsregularly

question the sources o bank margin, the size o

the net interest margin, bank charges and other

non-interest incomeWithincreasingnancialeducationandtheageof

the internet, it has never been easier or customers

to obtain comparative pricing placing pressure on

relationship bankers

Banksareavictimoftheirownsuccesswithmaturity

in many markets, resulting in increased competition

and limited growth opportunities.

Indeed, increased regulation and access to internaland external inormation, are both driving increased

transparency. This increased transparency will aid in

identiying the undamental risk actors aecting a

business so that they can be managed more eectively.

Financial institutions will have to adapt in order to stay

relevant to an ever more demanding set o stakeholders.

However, increased transparency and risk reporting

creates a need or key cultural and technological

changes in an organisation to take place. With this in

mind, value based management has never been morerelevant, but the matter o how such a concept can be

implemented comes into play.

Moving towards a unifed ramework

In our opinion a value based management ramework

should uniy business need or constant improvement

and growth with the ability to manage risk and stress a

banks portolio. While this may sound utopian, practical

steps are possible. As with most initiatives, stakeholder

buy-in is imperative at inception. A risk-reward culture

needs to be deeply imbedded at all levels and this

can only be achieved through extensive consultation

and training. Any attempt to ast-track or bypass this

process increases the risk that business units develop

independent strategies resulting in the classic patchwork

o systems that do not easily integrate.

Only once conceptual buy-in or a unied ramework

has been obtained, can work on the detailedimplementation begin. The rst step is to dene

business and risk requirements. Items such as nancial

orecasting and reporting requirements, regulatory

risk reporting and marketing strategy requirements are

generally known, just not consolidated in a single place.

It is typically in this phase that banks will determine their

required single views o customers, including both risk

and value measures. It is critical at design stage that

consideration is given as to how metrics can link directlyinto management strategy and targeted action.

Banks are a victim o their own successwith maturity in many markets,

resulting in increased competition andlimited growth opportunities


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Data management the starting

point and golden threadStill connecting the dots when it comes to

data management

Elsewherewecommentonthecontinuedregulatory

requirements acing South Arican banks and theimperatives to sustainably reduce their cost base andmaximise their revenues. The level o success achieved

in dealing with these challenges is heavily dependent onthe quality and availability o the relevant data the bankshave at their disposal.

Despite an increased ocus on systems and data, it is ourview that by and large, inormation and data systemsare still not suciently aligned. Consequently banks arestill aced with the challenge o redundant (and evenconficting) data housed in still largely separate dataenvironments. In addition, the available data may lack

sucient granularity and its quality may be uncertain.A recent global Deloitte risk management surveyound that almost hal the nancial services executivessurveyed cited a lack o alignment among inormationsystems as a major concern. We believe this is also avalid concern in South Arica. These concerns over theragmented nature o bank systems and the availabilityand quality o data obtained rom these systems is notnew and banks will continue to grapple with resolvingthis in 2011.

Regulators, boards and shareholders have signicantlyincreased their demands or inormation. Regulation isorcing the better alignment o risk and nance dataand a much larger ocus on r isk data. Key though is orbanks to go beyond merely replacing platorms, butthinking strategically how they deploy data throughouttheir organisations, recognising that the integrity odata is critical to the eective management o risk.

Banks also need to understand that d ierent parts othe organisation have dierent uses or the same data.In the end, a bank may only be as eective as the datait uses to manage itsel.

What are the ocus areas with regards to data

management in 2011?

Aligning systems while reducing costs

Central to this is the requirement or banks to store,

access and use their data more quickly and more

eciently across all o their d ivisions, businesses and

products eectively to become more ecient in

their core operations. Conversely, getting their systems

in a position to do this will, in most cases, require

continued signicant technology spend and this will

not be an area where costs will be easy to manage

in the years ahead. Although common business

operations have three dimensions: People, process

and technology, many organisations, when they

embark on transormation and require one view o

the business, choose to lead with the implementationoftechnology,suchasanewEnterpriseResource

Planning(ERP)system.Inanefforttominimisecosts,

Deloitte recommends that banks should not try to lead

transormation through technology. The right way to

transorm an organisation is to:

Beginwithpeopleandprocess

Makesurethattechnologyissetuptofollowthe

people and process rollout in an aligned manner.

In our experience, a pure technology-led eort oten

poses the threat o becoming overly technology

centred, resulting in low acceptance and a less than

expected positive business impact. This should be seen

in contrast to a signicant number o organisations

which preer to lead the transormation o their

business with structured and well thought through

process- and -people-related eorts to gain early

benets. These are then embedded and expanded

through a relatively low-key technology entrenchment.


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14

From the concept o single view o the customer

to customer intelligence systems

Original research conducted by Gartner in 2006

identied that many organisations oten had

ragmented inormation on customers due to

operating separate systems between divisions. This

made it dicult or organisations to truly understand

the value o customers. This research mentioned

that without a single view o those customers,

organisations would nd it dicult to eectively

retain, cross-sell, deliver eective customer experiences

or manage the risk associated with its customers.

As we ast-orward to 2011 where customers are

demanding seamless, multi-channel sales and service

experiences and not consistently receiving them, it is

clear that the traditional retail bank is at an infectionpoint. Many customers get contacted or products

and services they already have or products that dont

meet their preerences due to a lack o data synergy

regarding their records, within a banking institution.

Simultaneously, other nancial institutions and

non-traditional players are looking or opportunities to

invade this space or to redene it through disruptive

innovation. The result is orcing banks to examine a

more balanced, aligned approach to the customer

experience and growth.

It is key or banks to accept that merely pooling all

the inormation they have on a particular customer is

not enough. Obtaining and sustaining customer trust

and loyalty requires that their interactions with the

bank are timely and applicable to their needs. This

involves banks having up-to-date accurate inormation

collated rom every touch point with the customer.

IT planning and eectiveness is critical, as banks seek

to minimise costs and maximise value. Knowledge o

how customers behave and interact with the bank

can aid in uelling the uture strategy o how banks

do business. Deloitte believes South Arican banks

need to have customer intelligent systems that will aid

banks in unlocking the true value sitting in their data.

Banks should ocus on us ing inormation inrastructure

to be better positioned to serve their customers andunderstand customer and product protability better in

order to maximise their revenue. In order or this to be

achieved, banks need to apply sophisticated analytics

and employ timely, accurate data, which ultimately aid

it in maximising revenue and minimising risk.

...it is clear that the traditionalretail bank is at an infectionpoint


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Ensuring data is secure

Control o inormation continues to be critical to an

organisation, its employees, vendors and business

partners. Yet never has it been more dicult.

Unauthorised system access leading to compromised

data and inormation causes anxiety on the part o

executive ocers and security consultants, o almost

every organisation across the globe. Current business

trends only exacerbate the problem. Complicating the

issue is an intricate web o regulations and guidelines

that have been enacted by government and industry

watchdogs in an attempt to create a ramework or the

access to and dissemination o sensitive inormation,

particularly personally identiable inormation. In the

massively interconnected world in which business

is conducted today, organisations ace the burdeno managing complex inormation systems that are

accessed by thousands, i not hundreds o thousands,

o people daily.

The rapidly increasing number o users who require

access means that even seemingly simple activities

such as resetting passwords can become time-

consuming and costly. Passwords themselves represent

a notorious weakness within systems, applications,

and sites. Overwhelmed users, let to their own

devices, all back on simple, repetitive devices that

hackers and cyber-criminals have no diculty cracking.

Untangling this mix o disparate approaches to access

management and control, requires a strategy that

centralises access to corporate systems and programs

and draws on issues o identity recognition and

permissions, such as provisioning or deprovisioning,

that control access to corporate systems and programs.

Handled eectively, access control and managementcan lead to cost savings through operational eciency

and improved productivity.


18/26

16

Mobile payments banks have been whistling

the tune...Bankers have been talking about using cell phonesas a channel or consumer banking almost as longas energy companies have been trying to make solarpower aordable. However, it has taken a confuence o

actors to make mobile banking a reality, these includegeneration Y leading the charge on all things mobile,the increasing adoption o smartphones, product andservice innovations and consumer preerences shitingto the possibilities o banking wherever and whenever.Most banks have made substantial investments inmobile banking capabilities and smaller nancialinstitutions are not ar behind. As mobile bankinggrows, so too, will opportunities or banks to increaserevenues and gain operating eciencies.

Mobile banking is on the cusp o transormation roma niche service or the technologically elite to a mass-market service demanded by all customer segments.South Aricas online presence is increasingly beingdominated by cellphones and this trend is likely to growMobile technology allows banks to gain cost ecientaccess to the unbanked market pockets o not only theSouth Arican but the Arican economy, smaller bankingcompetitors in South Arica are already realising thegains o this market. Banks must prepare to deend

their ranchises against threats rom not only othernancial institutions, but also mobile carriers, credit cardprocessors and other nonbank competitors that want tohelp consumers conduct nancial transactions whereverthey and their mobile devices are.

As banks develop their strategies or giving customersaccess to their accounts or various uses through cellphones and other mobile devices, they should alsoregard this emerging platorm as a potential catalyst or

generating operational eciencies and as a vehicle ornew revenue sources (see transactions on cell phoneplatorms 2009 on page 17).

Transactions on cellphone platorms - 2009

Mobile payments at the

tipping pointQuick facts concerning mobile in Africa

In the third quarter o 2010 Inorma Telcoms and Media reported there are:

Morethan500millionactivemobilesubscriptionsinAfrica

By2015,therewillbe265millionmobilebroadbandsubscriptionsinAfrica

By2014therewillbemorethan360millionusersofmobile-moneyservicesonthecontinent

0%

Balan

ceenquiry

Increasing sophistication

2011?

Buyin

gairtim

e

Paya

ccou

nts

Buyp

re-paid

electrici

ty

Addb

enef

ciarie

s

Investin

g

Transeru

ndsb

etwee

nacc

ounts

Stateme

nt/M

ini-st

ateme

nt

10%

20%

30%

40%

50%

60%

70%

80%


19/26


...but need to start moving to the beat

Mobile banking gives banks the potential to expand

beyond their geographical ootprint as well as

ability to cross sell and up-sell products to existing

customers. Banks that harness these additional

mobile nancial services capabilities should see

a proound impact on the nature o the banking

relationship. Unlike supermarkets, department stores

and other businesses that see only one dimension o

consumers spending habits, banks have a broader

view o what their customers buy and where they

like to shop. This puts banks in a prime position to

develop a new line o business ocused on bundling

data analytics or retailers and other entities vying

or customer intelligence while maintaining

the privacy o individual customers inormation.Merchants could employ such aggregated inormation

to target customers more eectively than they might

through other means. Banks could also use the

knowledge o their core customers to strengthen their

own abilities to acquire new customers, cross-sell

existing customers, improve decisioning capabilities

and provide better customer service resulting in

signicant value streams or banks.

Ater a ew years o relative neglect, M-payments

are once again a hot topic in the payments market.

Much o this resurgence is down to the growing role

o contactless payments. The tap and go that is

synonymous with the UKs Oyster card payments is

now nding its way into mobile handsets as near-eld

communication (NFC), making the dream o paying or

retail goods with a wave o a mobile phone a viable

proposition. Banks cannot ignore this technology i

they want to protect their current market share and

maintain a competitive advantage in the uture. There

are a number o reasons why a bank might be tempted

to invest in mobile NFC technology, including lower

handling costs relative to cash and cheques, as well as

the potential to generate incremental customer and

merchant revenues. Contactless cards however, havemost o the speed and convenience o NFC mobile,

and the replacement cycle or bank-issued cards is

at least as ast and more easily controlled than the

mass replacement o handsets. More importantly,

establishing the mobile phone as a core payment

device may result in mobile operators demanding,

at a minimum, a ee or the use o their SIM real

estate, which would dilute banking returns. Though

contactless cards add the same upside as mobile,

banks cannot aord to ignore these technologies.

Failure to plan or new mobile technologies will

leave banks at risk o losing business and market

share to other players in the retail, technology and

telecommunication industries who are proactive and

possibly more willing to implement such technologies

given South Aricas saturated cellular market.


20/26

18

Set or growth

ArnoldEkpe,ChiefExecutiveofEcobank,commentedin

The Banker magazine that there are several challenges

associated with banking in Arica including geographic,

technological and inrastructural limitations that cause

banking in Arica to have higher costs in comparison to

other more developed nancial markets. A low savingsculture and lack o nancial education, particularly

amongst Aricas unbanked market, urther contribute

to these diculties resulting in lower levels o deposit

accumulation and asset growth. However, the growth

appeal o Arican markets ar outstrips the challenges.

According to the IMF, Aricas emerging market

countries have good prospects or 2011. Foreign direct

investment, particularly rom Aricas new trading

partners in Asia, is expected to strengthen and demandor Arican bonds is set to increase.

Sources: The Economist; IMF

I we consider the worlds ten astest-growing

economies according to the IMF, it important to note

that hal o them between 2001-2010 were Arican

countries and it is expected that between 2011-2015,

seven out o the ten astest-growing economies will be

Arican countries. Furthermore, we analysed household

consumption expenditure in West Arica and identiedthat it is expected to be higher than South Aricas.

This is being driven largely by higher growth rates than

South Aricas orecast rates.

Expanding into growing Arican

markets

11.1

10.5

10.3

8.9

8.4

8.2

7.9

7.9

7.7

7.6

Angola

China

Myanmar

Nigeria

Ethiopia

Kazakhstan

Chad

Mozambique

Cambodia

Rwanda

AnnualaverageGDP,%(20012010)

9.5

8.2

8.1

7.7

7.2

7.2

7.0

7.0

6.9

6.8

China

India

Ethiopia

Mozambique

Tanzania

Vietnam

Congo

Ghana

Zambia

Nigeria

AnnualaverageGDP,%(20112015)


21/26


Household consumption expenditure (WDI, IMF, EIU, 2010)

These values are estimated rom macroeconomic data which does not take into account incomes or household sizes. These values showaggregatedemandratherthananestimatedmarketsize(asthePovcCal.netandIESestimatesdo).

156

125

94

32 3120

3

219205

155

5850

32

10

281

324

248

94

75

48

24

$ 0

$ 50

$ 100

$ 150

$ 200

$ 250

$ 300

$ 350

South Africa West Africa Nigeria East Africa West A Excl. Nig. Southern Africa Angola

Billions

2005

2010

2015


22/26

20

Real Household Consumption growth percentage (IMF, WDI, EIU, 2010)

South Arica,0

,5

,2.2

,9.7

,4.2

,8.2

,9.6

,8.7

,10.4,9.6

,10.6,9.9

,12.6

,10.1

,24.6

,19.2

,10

,15

,20

,25

SouthernArica

West Arica(excl Nigeria)

West Arica Nigeria EastAfrica Angola

Key points

ForecastHouseholdConsumptionis

expected to decline slightly or the next

ve years

However,theratesarestillhighincomparison to South Arica which is

expected to be less than hal o these rates

Thedeclineintherate,coincidingwith

accelerating growth, refects the increasing

importance o the business sector in driving

growth going orward, which has positive

long-term consequences or growth.

2005-10

2011-15

Ripe or exploration

Management are increasingly called upon to

allocate limited resources between local and

international operations, identiy operating synergies

with current and new operations and picking the

biggest opportunities or their investment spend

going orward. Given the expected GDP growth

and signicant change in consumer expenditure

patterns o other Arican economies, (in addition to

the well publicised corporate, resource and trade

related opportunities), bank subsidiaries in Arica are

increasingly likely to oer greater returns on new

investments than local operations. In this ast changing

environment, managing the investment decision-

making process eectively, as well as maximising

delivery capabilities and eciencies will position banks

well or the opportunities to come.


23/26


Prepared or 2012?

A season o regulatory change will alter the ace o

banking as it has always been known, pushing banks

into a new, more regulated era that embraces a wide

range o stringent regulations as central considerations

to eective and sustainable business operations.

Banks need to be seen to proactively and eectively

manage their risk, minimise costs and maximise value.In this review Deloitte has ocused on the undamental

activities that should be considered by banks to help

them regain balance during 2011 and to eectively

prepare or 2012.

By placing these challenges prominently on their

agendas and tackling them proactively and creatively,

leading banking institutions can ensure they are

prepared as the economy resets and new consumerand regulatory demands emerge. Innovative and

holistically orientated banking heavy weights constantly

reassess the status quo, are prepared to experiment,

achieve total command over their data and are open to

investments in new systems and new markets.


24/26

22

Contacts and acknowledgments

Roger Verster

Deloitte Capital Markets: PartnerEmail:[email protected]

Murray Dicks

Deloitte Legal: DirectorEmail:[email protected]

Catherine Stretton

Deloitte Capital Markets: PartnerEmail:[email protected]

Pravin Burra

Deloitte Capital Markets: DirectorEmail:[email protected]

Duane Newman

Deloitte Tax Consulting: DirectorEmail:[email protected]

Ben Davis

Deloitte Strategy and Innovation Consulting: LeadEmail:[email protected]

Alethia Chetty

Deloitte Capital Markets: Senior Manager

Email:[email protected]

Candice Burin

Deloitte Markets: Market Insights Analyst

Email:[email protected]


25/26

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10. Receive ees that refect the value o services

provided and responsibilities assumed, and thatare considered air and reasonable.

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banking review 2011

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