After several drawbacks from COVID-19, many waltzed into 2022 with raised spirits that the worst was in the rear. But with several skid marks, many hardly brand 2022 as successful.
Starting the year with supply chain bottlenecks should have been a beacon of what was to come, but many still believed for the best. With the continuous RBA hikes and recession fears, 2022 soon became a horror story for many households and SMBs. EY Oceania, financial services leaders, offered their insight on the eventful year; here are their thoughts.
Grant Peters, EY Managing Partner Financial Services
We are closing in on the third year since the global pandemic started amid uncertain geopolitical and global economic conditions. The financial services industry has generally responded well and weathered the storm because of a strong focus on its customers and its people, while also embracing the digitization and automation of its operations.
Companies have done well to embrace modern technology to accelerate digitization and automation during the COVID-19 pandemic, but there’s more to do. There’s been a strong focus from firms in understanding what their future data needs are and how best to gather and embed data into their business operations, so they can go beyond the nuts and bolts of service delivery and develop more innovation to reach and serve customers.
Financial services firms will likely take a more strategic and longer-term view to simplifying their businesses, not just to reduce costs, but to meet the increasing experience demands. They will also need to continue to navigate the war for talent, given low unemployment rates, and focus on areas like living their purpose, rethinking the workforce skills they need for the future and how to attract and retain staff, and evolving the hybrid work environment.
While there was focus on this through the pandemic, we’ll see increased attention on operational resilience, including the robustness of supply chains and the services provided by third-party firms. Cyber and data security have always been important, but we will see a heightened focus on these given recent high-profile events in Australia and around the world.
As many firms look for future growth opportunities coming out of the pandemic in a very competitive market, they’ll likely focus on innovative ways of connecting with their clients with new products and services, including in areas adjacent to their traditional areas.
Doug Nixon, EY Banking and Capital Markets Leader
Some issues banks will face next year will be around the very careful management of provisions and credit quality, given the effect of recent rate rises on business and consumer debt levels. Banks have been laser focused on this, however, given the steep curve in which rates have been rising, it’s going to require ongoing time and attention from management to navigate through this as the effects of those rate increases manifest in 2023 and beyond.
Cost management, particularly because of inflationary and wage pressures, will continue to drive focus and attention of management throughout 2023, with banks looking to use a range of levers including cost takeout process efficiency and continued digitization.
The other big theme for 2023 will be competition and banks will deploy a range of mechanisms in order to achieve above system growth, which would include pricing strategies, distribution strategies, productivity strategies and product innovation that’ll be a defining characteristic of the Australian banking market to 2023 and 2024.
Banks are entering this period in a stronger position in terms of capital, liquidity and strength and quality of credit than they’ve been in for a very long time, thanks to the regulatory reform agenda and also to conservatism that was applied through the global pandemic.
This means that banks have a much broader suite of levers to position for in this turbulent period than they’ve had in living memory. We’re passing through this period of instability with a very strong financial system that provides not only the industry, but also the broader economy, with a stable foundation from which to face into some of the challenges ahead.
First of all, with geopolitical instability comes unforeseen risk for the industry and that manifests in a number of different ways, whether it be cyber, sanctions, particular counterparty exposures, or ancillary effects such as third-party supplier risk, which means that banks need to shorten their time horizon and be ready to react quickly.
Banks being able to approach traditional problems in untraditional ways in order to get the right outcome for the institution and their clients will be critical, and this requires more time and energy on individual exposures than a bank may have expended in the past. Competition and a constrained market will drive focused strategy for market share and liquidity.
More than ever, we’ve got non-traditional players vying for space in the market that may not be a level playing field. For example, newer entrants unencumbered by the full suite of lending standards, legacy infrastructure, capital requirements, regulatory requirements or licensing requirements. This not only creates a complex competitive environment, but also has the ancillary effect of pushing risk into less illuminated parts of the financial system.
Rita Da Silva, EY Wealth and Asset Management Leader
During 2022, global markets and financial services firms were impacted by volatility caused by geopolitical conflict, inflation, central bank intervention and increased regulatory action, further exacerbated by the competitive talent environment, the rise of responsible investing and COVID-19 related disruption still lingering. These drivers will continue into 2023 and Australia’s asset managers will need to accept and respond innovatively to this landscape.
With pressure on returns, margins and profitability impacted by market conditions, and scale and consolidation seen as key answers, the coming year will continue to see mergers and acquisitions activity in the asset management industry, including in the superannuation sector, where further consolidation will push asset managers into fewer relationships.
With interest rates rising and investors continuing to look for high-yield opportunities, we’re likely to see superannuation funds to expand their presence in areas like private debt. The drive for digital transformation of all aspects of their business that accelerated during the pandemic will advance for wealth and asset managers, as front and back-office functions implement more automated processes and tools to cut costs and create more efficiencies.
The delivery of advice will also be subject to regulatory overhaul, with the Quality of Advice Review expected to be delivered. Balancing these demands remains a challenging prospect. Regulators are focussed on operational resilience and risk management and true to label disclosures. This will impact the whole wealth and asset management ecosystem.
Walter Poetscher, EY Oceania Insurance Leader
Despite volatility recently, we believe the Aussie insurance industry is structurally attractive and recent trends to be cyclical. In many lines of business, the resurgence of underwriting margins from strong rate increases in recent quarters bodes well for industry performance over the next years, but claims inflation will adversely impact margins for some time.
We expect further rate increases necessary in home insurance on the back of higher catastrophe losses and post-event inflation, while motor insurance will likely revert back to normalised levels after COVID-19 tailwinds end and average claims size increase.
In recent years, there has been significant investment into technology, modernization and transformation, particularly in personal lines, revamping the customer experience, the use of data and the simplification of the business. Many industry players have invested heavily into digital and technology capabilities and are increasingly benefiting particularly well.
State-of-the-art cyber security operations, as well as further innovating cyber insurance offerings, will see heightened focus, accelerated by recent cyber breaches in the market.
Acknowledging the change required and encouraged by strong results, we see general insurers transition to investment in modernisation of commercial lines, similarly to their global peers. How can commercial lines learn from the transformation experience in personal lines, whilst acknowledging the bespoke nature of solutions and distribution arrangements?
Agility of the firm as a whole and specifically the systems environment is critical, which requires core systems and digital front ends to work together seamlessly in an ecosystem play, so we’ll see companies more and more looking for ways to create a frictionless business and bridge their legacy technology with new, advanced systems and partnerships.