Competition and digitization in focus for banks and capital markets


Newer entrants will create a complex competitive environment for the banks and capital markets, says EY’s Doug Nixon.

Competition and a constrained market will continue to drive focused strategy both for market share and liquidity in the Australian banking and capital markets sector in 2023, says Doug Nixon, EY Oceania Banking and Capital Markets Leader.

“Some of the main issues banks will face next year will be around the very careful management of provisions and credit quality, particularly given the effect of recent rate rises on both 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, Nixon says.

“This means that banks have a much broader suite of levers to pull and position for in this turbulent period than they’ve had in living memory.”

Nixon says, “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”.

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, Nixon explains.

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, he says, requiring a lot more time, effort and energy on individual exposures than a bank may have expended in past cycles.

“Competition and a constrained market will continue to drive focused strategy both 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.”