Market Issues: Perspectives from Transaction Services Banks Globally

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In January 2012, senior executives responsible for transaction services at more than 130 banks — across 61 countries — responded to the annual Market Issues survey from FImetrix.

The Market Issues study results highlight key trends across the regions. We thought it would be useful to provide our commentary in the spirit of "what to do now" — on how to take this information and turn it into action.

Market environment

As expected, banks are less optimistic about the general business environment in 2012. This is likely due to instability in Western Europe, as well as regulations both there and globally, such as Basel III and Dodd-Frank.

Although not approaching the post-Lehman levels of 2009, the number of banks reporting a negative view has nearly tripled since last year (31% vs. 13%). At the same time, positive sentiment decreased nearly 50%, from 62% in 2011 to 33% in 2012.

A long timeline for recovery

Across all regions, for those banks that rated the environment as neutral or negative, nearly two-thirds (65%) do not expect any improvement until at least 2013 or beyond. Less than one-third (29%) anticipate that to happen in the second half of 2012 and just 6% believe it will occur in the first half of this year. European banks predict the longest timeline for recovery.

Confidence in providers

Despite market skepticism, bank confidence in USD-provider banks remains high, especially relative to EUR and GBP providers. At 89%, trust in the USD providers continues to be strong (vs. 87% in 2011). Confidence in EUR and GBP providers declined.

Additionally, banks are concerned about three noteworthy indicators tracked by the research: Future of bank-to bank-to-bank business services, access to liquidity and access to credit. Confidence in all three indicators decreased in 2012.

Confidence is Down in Three Additional Areas

Confidence is Down in Three Additional Areas

The J.P. Morgan View: Preparing for a changing environment

The pessimistic outlook on the business climate and lower confidence levels will impact the business priorities of banks and create new challenges.

As a banking executive, you are probably looking for new ways to generate revenue and decrease costs to offset the expected impact on profits. Depending on your circumstances and strategy, you may be looking to grow revenues by expanding into new markets — but at the same time you are likely constrained from investing by capital pressures resulting from upcoming regulatory changes.

In view of these constraints, using the leading edge tools of a partner bank like J.P. Morgan is one way to defend your current business and grow your service offering while minimizing upfront investment costs. We have a variety of solutions to help you meet your goals in this challenging environment – don't hesitate to ask your relationship manager for advice.

At the same time, lower confidence level in some providers (amplified by a decrease in confidence in future bank-to-bank services and in access to liquidity and credit) may result in some banks reviewing their current providers and evaluating the provision of services. Banks may also be reviewing their providers in light of the trend towards the consolidation of banking relationships (see next section).

Consolidating Relationships

The vast majority of banks surveyed expect their relationships with other banks to either strengthen (45%) or remain the same (48%) in 2012. However, there has also been an increase in the percentage of banks that are looking to consolidate bank relationships in 2012 (53%, up from 40% last year) — reflecting the general economic unease and reduced confidence in providers. The only exceptions to this trend are banks in Latin America and the Middle East.

The J.P. Morgan View: Three key considerations for consolidating relationships

What are your key objectives?
- Enhance liquidity management?
- Reduce or eliminate counterparty risk?
- Achieve bank-wide cost reduction?
- Drive process automation and efficiency?
- Simplified funding and reconciliation?
- Standardized documentation and consistent procedures?
Does your current model measure up?
- How much time and money do you put into bank relationship maintenance? Do the relationships you maintain give you value for money?
- Do you use different banks for payments and collections in the same currency? Do you use different banks for different currencies? Does this lead to inefficiencies?
- Do you have many accounts with smaller volumes that can benefit from consolidation?
What do you look for in your banking partners?
- Is the bank a strong and stable counterparty?
- Does the bank have the right platforms to deliver a consistent service to allow you to obtain the full benefits of streamlining relationships?
- Does the bank have local knowledge and expertise in your key markets?
- Does the bank demonstrate commitment to and investment in the business?

Top 5 Areas of Focus in 2012

The survey also asked about leading issues banks will be focused on in 2012. The results are shown below.

Top 5 Areas of Focus in 2012

The J.P. Morgan view: How to best leverage your correspondent banking service provider

In each of the top five areas of focus executives mentioned, our J.P. Morgan Treasury Services FIG practice has developed solutions that can help you meet your goals. Below we list just one example of each. Give your relationship manager a call to discuss further ideas.

Product capabilities: Ask us about our latest beneficiary deduct and principal protection options.
Customer service: Ask us about how we can help you strengthen relationships with your customers with low investment, high speed-to-market services for wider coverage and capabilities.
Operational improvements: Ask us how we can help you to improve your STP rate and process efficiency with our global payments platform and experienced client service team.
Regulatory/Compliance issues: Ask us about our intraday SWIFT and proprietary reporting solutions.
Expense reduction: Ask us how we can help you reduce the number of nostros you manage.

Conclusion

The results of the latest Market Issues survey indicate a range of concerns for the transaction banking business and highlight areas of focus and development for banks. As a global solutions provider and one of the strongest financial services firms in the world, J.P. Morgan is ready to support the evolving needs of our bank clients as they strive to succeed in an increasingly complex market environment. Give us a call to hear our latest ideas.