Banks Develop New Cost Optimization Strategies, Facing Additional Challenges in Croatia and the Region

KPMG International conducted a study involving over 200 banking institutions, supported by comparative benchmarking analyses and personal interviews with bank leaders responsible for the new cycle of strategic initiatives. The KPMG study indicated that cost transformation and value creation remain key priorities for banks, according to the statement.

Analyzing the study alone, KPMG experts highlighted that the priorities of cost transformation and value creation in the banking industry are continuously evolving and changing. Thus, the initial analysis of KPMG’s research on global banks indicates a constant decrease in the cost-to-income ratio (CIR) before the COVID period, followed by an increase during the 2019-2021 period, partly due to increased employee and service costs, and partly due to investments in new technologies and increased provisions for loan losses.

The analysis shows that there have been recent improvements in the CIR indicator, mainly due to rising interest rates on loans, with a smaller increase in deposit interest rates. It is also emphasized that with rising inflation, along with the expected decrease in interest rates as the global economy recovers, cost management is once again becoming a key area of focus for banks.

The research also showed that most banks aim to reduce costs, but their goals are often not aligned with their broader business plans, while the business culture regarding cost reduction is not present throughout the organization. This is confirmed by the fact that 82 percent of respondents identified deep challenges in the business culture that affect achieving sustainable cost reductions, despite significant technological investments.

With room for cost reductions, a faster pace of changes is expected in the coming period that would enable this. Research indicates that an improvement in cost efficiency of approximately 10 percent is expected in the next 12 months, and even 20-30 percent in the next three years. Given the inflationary trends, these expected values represent key goals that banks will strive for in the upcoming period.

One conclusion of the analysis is that banks today have a better insight into the structure and drivers of costs, with approximately 86% of bank executives believing they have established a precise overview of the cost base and its connection to processes, while three out of four bank leaders believe they have the right incentives to achieve their goals.

Analyzing the research results, Daniel Lenardić, a partner responsible for business consulting at KPMG in Croatia, also points out the current relatively small size of banks in Croatia as an additional complicating factor.

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– The smaller size of banks in Croatia, along with a relatively wide range of products and services and a business network size similar to that of significantly larger comparable banks in the EU, further complicates achieving cost efficiency. There is also a need for significant investments in further digitalization of processes. With the recent significant increase in labor and service costs in the Croatian market, this is one of the main reasons that returns on investments in digitalization, as well as the associated cost reductions, are lower than those of the EU comparable group of banks, emphasizes Daniel Lenardić.

Further analyzing the situation in the domestic market, Zdravko Čičak, director in KPMG’s business consulting department responsible for banks and financial institutions, states that until now, Croatian and regional banks have compensated for these challenges through lower financing costs, primarily deposits, and lower labor and human resource costs.

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– In a situation of increased inflationary pressures and costs of new regulatory requirements, previous cost management options largely become inadequate and require banks to find other innovative solutions. Also, since last year, but even more so in the next few years, it is worth noting the costs of implementing relevant EU regulations and financial frameworks related to sustainable business and cybersecurity (SFDR, CSRD, DORA, etc.). These requirements will further complicate cost management and require additional human and IT resources from banks necessary for their implementation, emphasizes Zdravko Čičak.

KPMG experts also emphasize that while Croatian and regional banks are considering the next cycle of initiatives for cost transformation, the cost transformation strategy is beginning to expand beyond traditional client relationship functions (front-office) into operational costs created by departments in central support functions, such as marketing, payment processing and collection, risk management, IT support, finance and treasury, and compliance monitoring functions.