Financial services organisations still face difficult challenges ahead, says PwC

Worldwide the financial services industry is grappling with the severe stresses of a challenging economy, low interest rates, changing regulation, technological developments, and pressure on reducing pay, according to a report issued today by professional services firm PwC.

Tom Winterboer, PwC Financial Services Leader for Southern Africa and Africa, says: “Leaders in the financial services sector are still facing some of the most challenging business conditions of their careers as profitable margins come under considerable pressure amidst the recent economic uncertainty and businesses struggle to come to terms with potentially disruptive changes in regulation and legislation.”

South Africa’s CEOs are contending with very similar issues as their global counterparts, with the majority viewing over-regulation and a lack of skills as barriers to business growth, according to PwC’s 16th Annual Global CEO Survey. The survey is based on interviews with 349 CEOs in the financial services sector (149 from banking and capital markets in 49 countries; 92 from insurance in 39 countries; and 108 from asset management in 27 countries).

The findings form part of PwC’s newly launched ‘Africa Financial Services Journal 2013’, which addresses strategic, operational and technical issues that can potentially affect the sector’s future performance. PwC’s Africa FS Journal also addresses, amongst other issues, the future of banking restructuring in Nigeria, the changing tax landscape facing the financial services industry in South Africa, a proposed framework for the regulation of the South African hedge fund industry, the basis of the new Solvency Assessment and Management (SAM) regime, how to leverage better IT processes in Tanzania, the role of a retirement fund trustee in managing the liabilities of a fund, and managing talent in the financial services sector.

According to the PwC global CEO survey, CEOs in the banking and capital markets sector remain positive about their growth prospects, despite the recent economic uncertainty of last year with almost 90% anticipating increased revenues in the next 12 months and over the next three years.
In the next 12 months, 78% of banking capital market leaders anticipate expansion of their key operations in Latin America, 72% in South-East Asia, and 88% in Africa respectively.

Johannes Grosskopf, Banking and Capital Markets Leader for PwC Africa, says: “Many banks are adjusting their business models with the aim of restoring return on equity (ROE) to as near pre-crisis levels as possible by following a new formula of risk weighted asset (RWA) optimisation and other initiatives.” However, pursuing an over ambitious RoE target may result in false economies, and following too rigid a RWA optimisation could result in distorted business decisions, such as product pricing, warns the report. Banks need to be conscious of the possibility that although their actions may be rational at one level, they may result in frustrating the intentions of policymakers and precipitate a fresh wave of intervention and regulation.

Furthermore,90% of banking and capital market CEOs are interacting more closely with customers.

Grosskopf says that the banking industry is expected to settle into a new long-run equilibrium financial model over a three to five year period, defined in terms of a capital structure, which will satisfy all stakeholders.

Despite most insurers’ optimism about revenue growth in the near term, most see the prospects for the overall economy as tentative at best, with only 15% of CEOs believing that it will improve over the next 12 months. Nearly a quarter expect the economy to decline, though this is a much less pessimistic outlook than last year, when nearly half anticipated worse times ahead.

With slow growth in mature markets, many CEOs see greater potential in the still largely under penetrated emerging markets of South America, Asia, Africa, and the Middle East.

“Worldwide the insurance industry is also undergoing regulatory change, says Victor Muguto, Long-Term Insurance Leader for PwC Africa. South Africa’s regulators are also implementing proposals similar to Solvency II in Europe adapted to local conditions, more particularly SAM.

Muguto says that SAM will undoubtedly result in significant changes and challenges for insurers, but it should be a regime that leads to better capturing and management of risk resulting in insurers not holding more capital than they should. “The primary purpose of the SAM regime is the protection of policyholders, which will be achieved through developing a risk-based approach to supervision; aligning insurers’ capital requirements with their underlying risks and providing them with incentives to adopt more sophisticated risk management processes.”

In addition to the implementation of the SAM regime, South Africa has its own social reform agenda which could change the way insurers carry out their businesses over the next few years. Some of these include proposals to treat customers fairly which are aimed at regulating the market conduct of financial services providers, and pension, health and retirement fund proposals which are still in the process of development.

A significant percentage of asset management CEOs (78%) anticipate growth in the next 12 months and 86% predict growth over three years, reflecting the likely improvement in economic conditions. These confidence levels are similar to those in 2012’s survey, although significantly lower than the 2011 study, when all the CEOs surveyed expected their businesses would grow over three years.

“The availability of talent is seen by CEOs as the biggest threat to their growth prospects with the majority of industry leaders planning to change the way they manage talent and organise their businesses,” says Winterboer, “with 46% of asset manager CEOs expressing concern about the shortage of portfolio managers.”
In addition, the financial services industry is faced with a further challenge in the form of increased pressure from the tax authorities. Worldwide the tax authorities are focusing their attention on tax collections and compliance to bolster collections in revenue. The South African Revenue Service (SARS) has focused its attention on transfer pricing, cross-border transactions as well as follow-ups on the under declaration of provisional tax. The financial services sector has been on the receiving end of a number of legislative changes resulting from the perception held by National Treasury that equity-interest bearing instruments, interest-bearing instruments and insurance arrangements remain open to manipulation by the industry.

“Although the financial services industry will be forced to consider and change the way in which it does business amidst the economic climate and regulatory upheaval, it will bring about more certainty and safety to the market, including new opportunities for the industry,” concludes Winterboer.