Bracing for headwinds: How banks can navigate disruption

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The last year or so have been terrific for banks. I think banks have seen tailwinds coming through from high interest rates, high margins, and costs have generally been under control. And the provisions that banks have made during the COVID-19 era, I think much of that has been written back. The risk environment has been the lowest that banks have experienced. It’s been a fantastic run for banks around the world. And indeed, for most banks in this part of the world—if you look at India, Indonesia, Vietnam, Singapore—all have benefited from these tailwinds.

I think there are a few things which banks need to be careful about, because there are headwinds on the horizon. I would say that the first is that the high-margin era will come to an end. And the last ten years and 15 years of declining margins, that era will continue; driven both by competition and also by the fact that much of the deposit repricing will eliminate much of the interest rate benefits that have happened.

Second, inflation, which has been there around the world but certainly this part of the world, the cost pressures are beginning to come through. They haven’t yet flown through on the P&L (profit and loss statement), but they’ll certainly flow through in the next 12, 18 months.

And finally, that combination of higher costs and higher interest rates will lead to bad loans beginning to come back, starting with retail and small enterprises, and eventually with large corporations.

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In some ways, the opportunity that banks have had in the last 12, 18 months should give them the breathing room to adjust to some of these changes. And what I would argue is don’t miss the oxygen that exists. Take advantage of the oxygen to invest in building a franchise which will be more stable and sustainable in the future.

So, invest in new technologies. Invest in new talent. Invest in the digital transformation of your business. Make sure you are raising enough capital to secure yourself in bad times. And over and above this, make sure that your purpose and your focus remains resolute.

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