Transcript Bancon Report - 24 Frames Digital

Transform to Outperform :
“GOOD IS NOT GOOD ENOUGH”
Plenary session
3 December, 2010
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Key messages
Banks in India have had a terrific 10 years (8x profits) and
can look forward to an exciting 10 years ahead (6x profits)
But, just being good will not be good enough. The spread
between best and average is already large (50-100% in
growth rates) and will widen
Out-performance will require innovation and execution on 5
key levers. Leaders will differentiate on at least 1 of these
levers while also being competitive on the rest.
–
–
–
–
–
Customer Experience
IT leverage
Scalable Operating model
Human Capital development
Risk Management
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India’s banking sector showed high growth in both scale and efficiency,
and has been duly rewarded by capital markets, over the last 10 years
Banking assets
Cost-income ratio
` ’000 crore
Percent
18%
6,000
44
2000
2010
-20%
5.4x
1,105
2000
55
2010
Market capitalization*
Profits
` ’000 crore
` ’000 crore
23%
8x
7
2000
37%
59
2010
846
27x
30
2000
2010
1 As on 30th November 2010
SOURCE: RBI; CMIE; analysis
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It is well poised for another great decade of growth
5x
16% CAGR
Banking assets
` ’000 cr
5.5x
19% CAGR
4.1x
15% CAGR
Profits
` ’000 cr
Market cap
` ’000 cr
~30,000
323
~2,800
691*
~59
~6,000
2010
* Market cap as on July 30th 2010
Note: under “Evolving scenario”, bank loans/GDP grows from 56% to 77% & bank deposits/GDP grow from 78% to 104%
SOURCE: RBI; CMIE; analysis
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However, the growth is not homogenous – (a) Within India, there are
concentrated sets of high performing districts
Banking potential
Population density
Density
(Pers/Km2)
High potential
districts
>500
200-500
100-200
<100
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However, the growth is not homogenous – (b) Significant gap between
“best” and the average
Asset CAGR#
Market Cap CAGR^
31%
29%
+38%
21%
+158%
PSUs
12%
Median
Median
Best-in-class
Best-in-class
68%
+100%
37%
Large Private
Banks1
34%
17%
Median
+118%
Best-in-class
Median
Best-in-class
1 Large private banks are classified as banks having Assets > `10,000 Cr as on 31/03/05
# CAGR for years FY 05 – FY 10
^ CAGR for years FY 05 – FY 10 as on 31st March
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Five mantras for Winning Banks in India: Need to be distinctive on at least
one and competitive on the rest
1
Distinctive customer experience
▪ Customer centric products & processes
▪ Multi-channel delivery of sales & service experience
2
IT for competitive advantage
▪ Better information management
▪ Simpler architecture to quickly build scale & lower costs
3
Scalable operating models
▪ Lean techniques for higher productivity
4
Deeper risk management
▪ Not merely for compliance but to create differentiated
products, pricing and performance management
5
Human Capital management
▪
Build leadership capability (skills and mindsets)
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1 Customer loyalty matters, and not just satisfaction
ESTIMATES
Per cent responding fully agree
N = 6,618
100
-33%
-19%.
67
54
Overall
sample
Satisfied
and
not willing
to switch
Satisfied
and would
re-select
their bank
33% of satisfied customers
willing to switch their bank
44
Satisfied
and has
recommended
their bank
20+% higher share of wallet
with loyal customers for key
segments, and as high as
60-80% in developed markets
Levels of loyalty
SOURCE: Financial Services 360; McKinsey & Company Proprietary Customer Experience Survey
McKinsey analysis
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1 Winners have created an integrated propositions across segments
significantly enhance the profitability
CASE EXAMPLE
Additional Profits from Cross sell of Wealth
management solutions to SME banking
customers
Additional Profits from Cross sell of SME
banking solutions to Wealth management
customers
Indexed
Current profit
from SME
owner’s WM
Net interest income
Indexed
Current profit
from SME
owner’s WM
~100
Increased wallet
share of SME
owner’s WM
~245
~75
Net fee income
~100
~195
Increased WM
penetration of SME
~180
~145
Operation cost
Operation cost
Risk cost
~65
Profit
Profit
~110
~265
~365
~110 ~210
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1 Customer centric products/processes led to greater cross-sell
for Wells Fargo
Design incentive
program around
cross-sell (e.g., RMs
incentivized for closing
sales based on teller
referrals)
Create bundles that
lead to natural crosssell tailored to segment
needs (e.g. checking
account + credit card for
mass market; overdraft
rolls into revolve)
Retail cross sell
of 6 products/
household1;
~20% bought 8+
products
Maximize cross-sell in first
sale & create easy options to
buy other products (e.g. 4-5
products sold at primary POS;
signature on file for future
purchases)
Leverage technology
to enhance reach (e.g.
drive sales from
alternate channels vs.
through only branch)
1 As on Q12010 for legacy Wells Fargo only (does not include Wachovia)
SOURCE: Wells Fargo Investor presentations; McKinsey analysis
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1 Itau has successfully used alternate channels like ATMs to
drive sales as well
Home menu
Sales volume through ATM channel
Per cent, # of transactions
Others
Using ATM as a tool to…
▪ Provide active offering in
several screens/
moments
– Cross-sell products
like loans, overdrafts
through ATMs
ATMs
End of transaction
25%
38%
63%
Exit screen
▪ Manage credit &
collections cycle
Overall
SOURCE: Itaú
Credit
Personal
Loans
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1 American Express’ dedicated SME community displays its numerous
product offerings, related services, and customer forums
Cross-sell
related
products
Log-in for
self-servicing
Best-in-class
card offering
Online
community
with SME
advisory
services
Impact
 47% market share1
compared to combined
37% for the next 4
 OPEN cards had spend
10x of US card spend
avg
Access to
expert content
on SMErelated issues
1 Market share of Small business Credit
and charge volume in 2008
SOURCE: Company website
Instant, targeted
promotions
Lean direct
purchasing for
informed SMBs
Savings programs
with SME partners
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2 Information, not just technology will be the strategic weapon of future:
CEO/CIO IT Survey
Increasing IT investments…
...with particular focus on MIS/CIS/Risk
Planned future IT spend
% of CIOs who selected the option
Future priority investment areas for IT
% of of CEOs that ranked a given choice
in Top 3
Future IT spend
CEO response
MIS/CIM/Risk
management
Decrease
20
Alternate retail
channels
Keep
same 7
43
Core Banking
System
73
Increase
54
29
Support function
systems
(e.g., F&A, HR)
11
Specialised
product systems1
10
…will make
information a
strategic weapon
1. Create an ondemand
information
architecture
2. Establish
information
governance
3. Build
information
analytics
capability
1 Examples include cash management, trade finance, treasury systems and others
SOURCE: 2010 Transforming Banking through IT Survey of Indian banks
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2 Santander’s robust IT platform, PARTENON, was a key
enabler for acquisition led growth and value creation
SOURCE: Corporate and Press releases
▪
Single technology platform –
PARTENON
▪
2 Regional IT development
centres: Madrid and Chile
▪
Four regional operating centres
– Madrid
– Milton Keynes (UK)
– Queretaro (Mexico)
– Sao Paulo (Brazil)
▪
Significant cost savings: 25%
reduction in transaction costs
▪
Rapid product delivery
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2 Capital One employs a robust micro campaign engine to test ROIs on
every campaign
Group
To determine the expected
ROI of each campaign…
A
Uplift:
25%
Cost: $12
ROI:
700%
Uplift:
67%
Cost: $30
ROI:
1,000%
Uplift:
25%
Cost: $7
ROI:
1,300%
B
Uplift: 6%
Cost: $12
ROI: 66%
Uplift:
90%
Cost: $30
ROI:
480%
Uplift: 2%
Cost: $6
ROI: 130%
Uplift: 8%
Cost: $11
ROI: 66%
Uplift:
125%
Cost: $31
ROI:
600%
Uplift: 0%
Cost: $6
ROI: 150%
Offer 1
Offer 2
Offer 3
C
Offers
SOURCE: McKinsey
…Capital One employs a
strong micro campaign
engine to test wording,
pictures, channels and
pricing in more than
65,000 test campaigns
and launches more than
1000 campaigns annually
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2 How Banks manage IT?
Best in class
Average
▪ Monolithic CIO functions
▪ Primary focus on IT & business needs
Role of CIO
▪ Optimizing costs; maintaining service
Performance
▪ Seamless with customers and partners
▪ Gain sharing partnership arrangements
▪ Standardized and tiered framework
Governance
▪ Differentiated investment management
▪ Managing large operations
▪ Business understanding
▪ Based on capital expenditure
Skills
Sourcing
Model
▪ Increasing differentiation of the role
▪ Focus on customer & IT innovations
▪ Ability to strike partnerships,
▪ Key customer facing executive
▪ Computing power
▪ Scalability
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3 Lean techniques help build scalable business models and help
improve speed, productivity and customer relations
Impact of eliminating waste in home loan processing
(composite across 3 big Indian banks)
Median across 3 banks
Lean techniques drive
productivity & eliminate
waste
▪ Improved hand-offs
Days
Best in class
-69%
Turn around
time
15-18
5-7
▪ Image-based
documentation
▪ Dynamic and
Files per day per FTE
Credit
appraisal
productivity
Segmented staffing
+167%
1-2
▪ Standardized
protocols
3-5
Per cent
Applications
lost due to
delays
-73%
10-12
<3
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4 To support growth, best banks have moved beyond conventional
compliance-focused risk management
Average
Best in class
Risk
transparency
▪ Many risks, few insights
▪ Few mega risks with deep insights
Risk strategy
▪ No explicit decision making criterion
▪ Deliberate choices on risk
Risk-enabled
decisions and
processes
▪ Geared for compliance,
▪ Geared to improve decision-making
divorced from business decisions
Risk
organization
and
governance
▪ Extremely bureaucratic
▪ Little traction with line
▪ High priority for the top team
▪ Clear ownership for line functions
Risk culture
▪ “Fuzzy” concept
▪ Clarity on vulnerabilities and action
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4 New risk assessment approaches to SME lending have improved GINI
EXAMPLE
coefficient by 10-15 points with volume growth of 4x-5x
Such
Whatapproaches
‘good’ looks have
like increased predictive power of
decision models by 10-15 GINI points across countries
New risk assessment
approach for SME loans
▪
▪
▪
Predictive power
(GINI) in points
Quantitative model only
81
Quantify inherently
qualitative risk factors
(e.g. top team quality)
Add factors that use
team insight/ expertise
(e.g. signs of liquidity
problems/fraud)
72
Quantitative model +
separate QCA
82
80
75
65+
75
65
54
30
Flexible to limited data
availability
India
SOURCE: McKinsey Risk Management Practice
Taiwan
Hong Kong
China
North
America
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5 Human capital development key to winning war for talent:
better players had lower attrition despite paying less
RULES-BASED
DECISION MAKING
Above average players
Agent compensation
Proportion of team leaders,
ops managers grown internally
US$/annum
Per cent
Below average players
88
6,108
61
3,542
Attrition
Per cent
33
27
Cross-skilling ratio
Team leader attrition
Per cent
Per cent
35
24
20
15
SOURCE: P360° benchmarking; McKinsey analysis
Above average players
had 6% lower attrition
despite paying 40% less
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Key Questions to identify where and how to outperform
1
Do we know in a really granular way which specific segments
and local markets will drive 50%+ of our incremental growth?
2
How to drive customer loyalty, not just satisfaction? What are
the best ways to use product bundles, relationship pricing and
front-line incentives to drive share?
3
How to maximise value from IT e.g., for analytics, customer lifecycle management, multi-channel delivery?
4
How to move from BPR (e.g., loan processing centres) to truly
scalable operating models (e.g, lean workflows between frontmiddle and back offices)?
5
How to develop our talent in a large-scale (e.g, 1000+
managers) way and equip them with new skills and mindsets?
6
How to move Risk from a compliance function to drive
differentiated products, pricing, and performance management?
7
What changes are required to organisational structure,
capabilities and mindsets to deliver 3x growth in next 5 years?
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Design and execution on these questions will drive out-performance
Asset CAGR#
Market Cap CAGR^
31%
29%
+38%
21%
+158%
PSUs
12%
Median
Median
Best-in-class
Best-in-class
68%
+100%
37%
Large Private
Banks1
34%
17%
Median
+118%
Best-in-class
Median
Best-in-class
1 Large banks are classified as banks having Assets > `10,000 Cr as on 31/03/05
# CAGR for years FY 05 – FY 10
^ CAGR for years FY 05 – FY 10 as on 31st March
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End of Document
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