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Banking Strategy for the Long Game

Heed the macro trends that are reshaping the industry

With “disrupt,” “adapt” and “agility” appearing almost 400 times in the latest annual reports of the 20 largest global banks, it’s clear that bankers face an identity crisis. They can be forgiven a degree of paranoia: Of the 20 largest global banks as of early 2017, one-third were new to the list since a decade ago. Even more startling is their shift in relative market share compared with the major technology firms.

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Anxiety about these massive shifts leads many bank management teams and boards to focus overwhelmingly on the short game, especially the next quarter’s stock performance. Yet in many ways, the underlying business remains a long game. For example, consumers in the UK change their primary bank only once every 15 to 20 years on average, based on data from the UK’s Competition and Markets Authority.

Tier 1 capital—the long-term capital that serves as the last defense against failure—has reached a record-high $2.4 trillion for the 20 largest banks globally. Bank equity investors currently pay for 13 years of annual earnings in Western markets. And the loan portfolio for the top 20 banks is fairly long-term, with one-third of loans maturing in more than five years.

Banking thus is much more than a current flow business; banks transform short-term actions into long-term value for stakeholders. So discussions about strategy, which typically cover three-year horizons, should in fact extend to a decade-long perspective. Banks need to manage for the long game, through the cycles, even as they adapt in the short term through test-and-learn experimentation. Given the technological and market changes roiling the industry, the coming decade may well bring even greater transformation to banking.