Investment Bankingcurrent and futurechallenges and changes

Current and prospective industry challenges, changes, disruptionsDon’t react to changeCreate it.03

Current and prospective industry challenges, changes, disruptionsCurrent and prospective industry challenges, changes, disruptions05The Financial Services industry catches FinTech fever07The future of the investment banking landscape09Linking our unique African integrated offerings1104

Current and prospective industry challenges, changes, disruptionsCurrent and prospectiveindustry challenges,changes, disruptionsThe challenge for the investment banking industryrevolves around higher capital charges, marketelectronification & digialisation, stuck cost base,inflexible and layered technology with increasedcomplexity of regulation and reporting.1. Regulation drives businessbehaviourBanks are already fully engaged inmeeting the IFRS 9 requirements andthe resulting changes to their businessmodel with specific focus on provisioning.Pressure to build appropriate models anddata requirements only leads to greatercomplexity.Basel III has increased focus onmaintaining core liquidity and leverageratios with pressure on reducing shortterm funding, holding more liquid assets,raising long-term wholesale funding,while reducing leverage both on and offbalance sheet.2.Capital is scarceThe effect of Basel III has resultedin fundamental shifts in productprofitability. Structured derivatives andlong dated transactions pre-crisis & Basel3 in many cases are now a drag on ROE.This has resulted in the shift towardsthe creation of non-core divisions todispose of unprofitable transactions &portfolios. Commoditised exchangedtraded OTC products has resulted ina fundamental change in margins andcapital management.3.Pressure on costs as suboptimal ROEbitesInvestment banks face significantpressure to reduce their cost base asregulation has bitten. Industry expertspredict only 5 to 6 investment banks05will be successful as “transformational”cost initiatives fail to deliver results onthe back of complex infrastructure andgovernance hurdles.4.Banks are required to utilise theircustomer knowledge to not onlyretain but grow their customerreturns through more effective crosssell.The ability to measure and cross sellproducts has become increasinglyimportant to a company’s ability toremain competitive, while best servicingall bank customers with an eye on capitalreturns.5.The emergence of Fintech companiescreates a disruptive marketplaceThe African financial services market isexpected to be one of the most receptiveFinTech markets globally, opening thedoor to disruption across the end toend investment banking value chain.Blockchain is rapidly seen as changing theface of cross-border lending activity.6.Outdated, inflexible physicalinfrastructure restricts movementand growth in the current digital ageThe traditional infrastructure of banks(both physical and technical) has provento be inflexible to change and thisrenders their ability to survive “as is”in a disruptive marketplace potentiallyunlikely.

Current and prospective industry challenges, changes, disruptions7.Increasing complexity of reportingand responding to new and evolvingregulation with focus on dataoptimisationThe evolving demand for reportingcompliance including governanceoutlined in BCBS 239 & Pillar 3 poses newchallenges to all banks. This increases thepressure on data optimisation throughaccuracy, timelines & granularity of risk &financial reporting requirements.8.The client onboarding conundrumThe increased pressure for banks to bothhistorically clean up their adherence toAML and KYC and remediate & streamlinetheir current procedures. The cost ofcompliance continues to rise with highercapital requirements resulting in thereview of existing business model bothgeography and client segments.11.Cyber SecurityNumber of cases of digital theft fromBanks through bypassing risk controlswithin Swift. Swift processes 6tntransfers daily with 11 000 members.EBA to stress test financial institutions toassess vulnerability to hackers & Swift toimplement “two factor” authentication.12.Regulators get tough on BCBS 239A number of regulators globally are nowseeing adherence to meeting BCBS239as a compliance requirement as opposedto set of principals. This has resulted inconsiderable investment cost to meet thecurrent deadlines. Watch this space.9.Disruption is ripe in all financialmarketsDisruption in markets such as foreignexchange is reshaping the bankinglandscape and how the traditional playersexist in the ever-changing landscape withdecreased market share and margins.10.Market Place LendersSecuritising consumer debt as thechallenge to raise funding to match newlending activity with 90% of fees fromnew loans with increased financingfrom Institutional investors. Regulatorspush for greater transparency indicatingdisclosures. A bubble in the making in thecurrent low interest-rate environment?06

Current and prospective industry challenges, changes, disruptionsThe Financial Servicesindustry catchesFinTech fever“FinTech heralds the dawn of narrow banking andportfolio optimisation. It will change the nature ofmoney, shake the foundations of central banking anddeliver nothing less than a democratic revolution for allwho use financial services.” Mark Carney, governor ofthe Bank of EnglandAnnual global investment in the FinTechindustry has grown by a factor of 6.5multiples in the past 5 years, representinga compounded annual growth rate of 45%.Goldman Sachs, Citi and Santander werethe most active investors among the largebanks. Central banks have also enteredthe fray with the Singaporean central bankfunding a Blockchain-based record-keepingsystem as part of a five-year 225minvestment, the Canadian Central Bankannouncing it is working with the country’slargest banks to develop an electronicversion of the Canadian dollar and theBank of England’s intent to use Blockchainand a digital central bank currency to widenaccess to its real-time gross settlementsystem (RTGS), which processes 500bnworth of transactions each day.Annual Global VC Investment in FinTech775701 14.40553440 7.30319 2.202011 2.502012Investment (Billions)Source: Deloitte analysis on CB insights data07 3.0020132014Number of deals2015

Current and prospective industry challenges, changes, disruptions08

Current and prospective industry challenges, changes, disruptionsThe future of theinvestment bankinglandscapeThe changes and evolution of the financial serviceslandscape that we have seen to date is just the beginningof an ever-developing eco-system. Success in this newenvironment will force changes in the way financialinstitutions see themselves and their customers, the way inwhich they tailor and channel pioneering products, and theinnovative strategies they use to combat new disruptors. Decreased customer profitability andincreased competitionCustomer profitability and measurementof capital has become an increased focalpoint as banks continue to operate in anever competitive market. As competitiongrows, margins will be squeezed andultimately only the most efficientcompanies will survive. Continued development andoptimisation of data sources asduplicate demand for informationand reporting continues to increaseLeveraging data sources will provideinstitutions with a more granular viewof the marketplace and the existingrisk. This ability will offer new firms acompetitive advantage as they are ableto tailor their risk and business modelstrategy. Existing competitors will alsobenefit from leveraging this informationto identify untapped opportunities withinthe marketplace. Investment banks areset to utilise this data to raise profitability,map out markets and companyexposures and ultimately - win moredeals. The analysis will boost profitabilityby promoting a better understanding ofthe customer and placing the institutionin a better position to understand andmeet their client’s needs.09

Current and prospective industry challenges, changes, disruptions Volume driven profitability (ratherthan margin driven)Margin driven products and profitabilityare set to make way for volume driveoperations as the competitive landscapecontinues to develop Major focus on cross sell of productswith eye on capital returnsFinancial institutions will continue todevelop their need to ensure effectivecross-selling of products and services tomaximise capital returns Compensation subject to balancedindependence risk score-cardsassessmentIn years past, excessive risk-taking wasdriven by the potential for excessivelylarge rewards, this is set to be a thing ofthe past driven mainly by the expectedincrease in use of developed independentrisk score-cards assessment for financialinstitution leadership Continuing development ofregulations such as Twin Peaks willforce transparencyRegulations such as Twin Peaksencourages transparency and enhancesthe integrity of the banking market byplacing equal importance on market andprudential conduct supervision Structured derivatives are set tobecome the domain of a smallnumber of investment banksStructured product’s ability to offercustomised exposure, including tootherwise hard-to-reach asset classes andsubclasses, are set to make structuredproducts important as a complement tothese other traditional components ofdiversified portfolios Financial engineering requirementsbecome a vital part of any successfulbanking structureAs reporting complexity and maturitycontinues to develop, financial engineeringrequirements are set to be limited tospecialised and well capitalised financialinstitutions Independent pricing vendors are setto be used by all financial institutionsAs competition in the financial institutionslandscape continues to strengthen,independent pricing vendors forcingtransparency and equilibrium are set tobe key Confluence of DisruptorsBlockchain is forcing Financial Servicestransactions can be digitised and securelydistributed – will impact F2B lending,Syndication & Trade Finance Bitcoin Stability RiskFinancial Stability Oversight Committeehas warned that like most newtechnologies certain risks & operationalvulnerabilities with such systems until theyare deployed at scale. Dramatic increasesin transaction delays & failures as newBitcoin transactions exceed the speedthey can be added to the Blockchain New Digital Currency to clear & settletradesFour of the world’s largest banks combineresources to develop a new form ofdigital currency to clear & settle financialtransactions which is estimated to cost theindustry 65bln to 80bln annually. Basedon Blockchain technology to speed upsettlement & freeing up billions of poundsof capital by creating utility bitcoin thatare directly convertible into cash at centralbanks, cutting the time and cost of posttrade settlement and clearing. Optimising CollateralThe increased cost of capital has resultedin the need to optimise collateral assetsand obligations. Increased sophisticationwith the use of algorithmic methodologywith haircuts, concentration requirementsand eligibility are major considerations Service Centres of the futureIncreased use of robotics will result in asignificant shift in size and structure ofcurrent service centres run by financialinsititutions leading to greater efficienciesand improved control enviroment Standard Initial Margin Model forNon-Cleared DerivitivesThe push to develop and implementa standardised methodology for OTCderivitives not settled through clearinghouses eliminating collateral disputes in amarket of 170th % national value European Stress Testing Lessons forAfricaWhile the EBA’s stress testing results forEuropean Banks was largely positive itstressed emphasis on the need for strongCET1 capital to avoid additional capitalraising The continued evolution of FinTechmeans flexibility becomes crucial tosurvivalUnderstanding, regulating and maximisingthe benefit of FinTech is set to be acritical means of not only success, butalso survival in the investment bankinglandscape of the future Intelligent Risk CultureBecomes a key competitive advantage byshifting from overnight to real time. Thisrequires a significant shift in Technology &Organisational capability10

Current and prospective industry challenges, changes, disruptionsLinking our uniqueAfrican integratedofferingsStrategy and InnovationWe help our banking and investmentsclients deal with changing operatingmodel structures, business and financetransformations, evolving customerexpectations and changes to theecosystem which redefine the rules offinancial services.Capital MarketsWe proactively assist banks and corporatesto implement risk management, capitaland funding (incl. liquidity) frameworks. Wealso assist clients to leverage their systemsto better manage their balance sheets,while providing regulatory and accountingexpertise and advisory.Deloitte DigitalWe help clients reimagine how profits aregenerated, and how relationships with yourcustomers are created and managed. Wereshape how work gets done, and rewirethe competitive fabric of entire industries.That’s the power of driving disruption.Risk and AnalyticsWe maximise the performance of internalbusiness operations by identifying,predicting, resolving and mitigatingimminent threats and obstacles as well asenhancing the value of these Strategy &InnovationRisk andAnalytics

Current and prospective industry challenges, changes, disruptionsContactsFor more information aboutInvestment Banking, please contact:Mark ArnoldDirector: Financial Services InstitutionDeloitte Consulting 27 72 853 [email protected]

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the integrity of the banking market by placing equal importance on market and prudential conduct supervision Structured derivatives are set to become the domain of a small number of investment banks Structured product’s ability to offer customised exposure, including to