WHAT NEXT FOR GLOBAL BANKING THE CHALLENGE OF

WHAT NEXT FOR GLOBAL BANKING? THE CHALLENGE OF COMPLEXITY MAY 21, 2015 Alan Mc. Intyre Partner OLIVER WYMAN GROUP © Oliver Wyman | NYC-OWX 00301 -011

Global banking returns have stalled at utility levels Average ROE of Bank vs. non-Bank sectors in S&P Global 1200 20 18 Average ROE (%) 16 14 12 10 8 6 4 2 Banks © Oliver Wyman | NYC-OWX 00301 -011 Other industries 1

Canadians banks have clearly outperformed US banks over the last decade Canadian versus US Bank ROEs US Top 50 Bank ROE © Oliver Wyman | NYC-OWX 00301 -011 Canadian Top 6 Bank ROE 2

Bigger is not now better in banking Change in ROEs of 24 GSIBs Change in ROE of rest of top 1000 banks ~1% ROE (2006) NIM decline © Oliver Wyman | NYC-OWX 00301 -011 Performance Higher decrease capital charges ROE (2014 Q 2)3 ROE (2006) NIM decline Performance Higher decrease capital charges ROE (2014 Q 2)3 3

Productivity in US financial services has stalled US multifactor productivity index by sector, 1987– 2012 70 Productivity index 60 50 Productivity gap of FS vis -a-vis Tech. ~35% 40 30 20 10 Productivity CAGR ’ 01–’ 12 for Finance and Insurance sector = 1% 0 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Financial Services © Oliver Wyman | NYC-OWX 00301 -011 Technology Manufacturing 4

Productivity in Canadian financial services has also stalled Productivity index Canada multifactor productivity index by sector, 1987– 2012 Manufacturing © Oliver Wyman | NYC-OWX 00301 -011 Technology Financial Services 5

Complexity is the major challenge facing the global banking industry © Oliver Wyman | NYC-OWX 00301 -011 6

Complexity is the major challenge facing the global banking industry Regulation © Oliver Wyman | NYC-OWX 00301 -011 8

The impact of regulation on returns Post-crisis impact of regulations on Bank ROEs Global Wholesale Banking US Retail Banking 0 -1% -2% -3% -4% -5% -6% -7% -8% Estimated Ro. E impact post-mitigation © Oliver Wyman | NYC-OWX 00301 -011 Bull to Bear 9

Sources of complexity Regulation © Oliver Wyman | NYC-OWX 00301 -011 Proliferation of channels 10

St. Peter’s Square on April 4, 2005 © Oliver Wyman | NYC-FSP 10001 -022 11

St. Peter’s Square on March 13, 2013 © Oliver Wyman | NYC-FSP 10001 -022 12

Sources of complexity Regulation Proliferation of channels Fragmented infrastructure Proliferation of products M&A Geographic expansion Stagnant productivity and unattractive returns © Oliver Wyman | NYC-OWX 00301 -011 13

Big picture business portfolio analysis • Geographies • Businesses Value • Products • Customers Things © Oliver Wyman | NYC-OWX 00301 -011 14

Typical response of banks to regulatory change © Oliver Wyman | NYC-OWX 00301 -011

Triaging regulation Regulator says Do X! Is this compliance? Is this strategy? • Skills-based • Impact analysis • Modular • Business choices • Shared services • Only then – Systems – Organization – Efficiency • Accurate and efficient © Oliver Wyman | NYC-OWX 00301 -011 16

The illusion of customization Toyota Camry Toyota Highlander Toyota Solara Lexus ES 300 © Oliver Wyman | NYC-OWX 00301 -011 Lexus RX 300 17

Platforming in banking Customer channel Advisor Product components Branch Configurable components ATM Mobile/ internet Phone Few legacy silos Process management Common front end Image and document management Intelligent workflow Security Database management Web services Common data layer Integration layer Common application Services © Oliver Wyman | NYC-OWX 00301 -011 18

In conclusion • Increasing complexity has lowered returns in banking and caused productivity growth to stall • Key drivers are regulation, proliferation, and operational fragmentation • To simplify their business banks must: – Be ruthless in their application of the 80/20 rule – Learn to manage regulation as a core competence – Create the illusion of customization without the silos © Oliver Wyman | NYC-OWX 00301 -011 19