Deloitte: Is bank specialisation in the Middle East worth its risks?
Driven by difficult market conditions, concerns about complexity, and new regulation, many banks are making tough strategic choices, and changes that may result in a sharper focus on a select set of “core” businesses. In other words, they are specialising.
While the potential benefits of specialisation are likely to be many and are widely anticipated, less attention has been paid to potential difficulties and downsides. A new report from Deloitte, the largest professional and consultancy firm in the world, entitled Bank specialisation: new strategies, new risks? highlights the likely risks created from specialisation and the actions banks might take to mitigate these risks.
The Deloitte report indicates that specialisation is a major strategic trend in the banking industry, with risks and benefits both requiring careful assessment. This is because execution of the specialisation strategy can be challenging and presents a number of risks that may not be new, but will likely be more prominent.
“Alongside market challenges and pressure on results, regulation plays a large role in banks’ strategic direction,” said Joe El Fadl, financial services industry leader at Deloitte Middle East. “Basel III-inspired capital provisions and framework for new liquidity requirement, while yet to be fully implemented, are perhaps the most significant drivers of specialisation. Higher capital and tougher liquidity requirements and more stringent risk-weighting rules have forced banks to set their priorities and make hard choices about where they compete. In the Middle East region there has been a trend, even though still modest, to shift slightly towards Islamic banking driven by market demand.”
The Deloitte report puts forth 3 main types of specialisations:
Business specialisation: refers to the relative focus on a particular business or product.
Geographic specialisation: refers to the relative focus of an institution on particular geographies.
Customer specialisation: refers to the relative focus of an institution on a particular type of customer.
The report also provides an analysis of shifts in concentration risk, operational and investor risk, and reputational risk that banks will have to make in the near future as related to specialisation:
Concentration risk: A more specialised institution may be able to build its reputation and expertise; boosting revenue potential derived from specific core business segment(s), but will also become more dependent on its primary business line and exposed to specific business and markets, thus more vulnerable to changes in the sector leading to revenue volatility.
Operational and execution risks: For specialising institutions, the changes to the structure and goals of the firm may generate difficulties in a number of areas such as costly gaps in technology and support structures and changes in the bank’s culture.
Investor risk: Changes in focus can be misunderstood or negatively received by investors.
Reputation risk: As banks specialise, they may experience damage to their reputation, especially if business diversification formed the core of their reputational capital or brand appeal.
“Specialisation leading to focus on specific business where expertise lies potentially carries many benefits to institutions that carefully assess their core strengths,” explained El Fadl. “Managing these four risks will likely require both implementation of known leading practices and new ways of looking at bank strategy,” he concluded.
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