Ready, steady, grow the role of the CFO in seizing new opportunities

Ready, steady, grow

The role of the CFO in seizing new opportunities
Written by The Economist Intelligence Unit

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cross the financial services sector, many chief financial officers
(CFOs) have reluctantly put their growth plans on the back burner
in order to focus on two new imperatives. First, to cut costs to
the bare minimum; and second, to transform the business in a way that
can meet the rapidly evolving demands from regulators—especially in
areas such as data reporting, scenario planning and liquidity/capital
reserves. The question now is whether the effort that they have put
into these initiatives will help to drive growth, now that the economic
climate is starting to pick up.
Mark Rennison, CFO at Nationwide Building Society, says that the
economic crisis and downturn did not force the mutual lender to alter
its customer-centric business strategy, but that the aftermath has
forced financial organisations to re-prioritise in order to meet new
regulatory standards.
“We’ve had to deal with legacy issues, and worry about investments that
the regulators want us to make in order to help the financial stability of
the wider system,” says Mr Rennison. “Maybe it’s no coincidence, but
as we are emerging into a more favourable economic outlook, we are
also nearing the end of the worst of capital pressure on the UK financial
services industry as a whole, and in particular the uncertainty that has
characterised that.”
Meeting a new set of regulatory expectations would always have been

difficult, but the challenge has been exacerbated by the fact that those

expectations have continued to change, he says. “To an extent, we’ve
been trying to hit a moving target for a considerable amount of time
and that kind of uncertainty is always unhelpful.”
The industry is not out of the woods yet. Mr Rennison expects the
debate to continue for another 12-18 months. “But we are getting
the opportunity to take some braver and bolder decisions about how
to use our capital—particularly with regard to where we can invest.”
For example, he is keen to move forward investment in technologies
that can improve customer relationships and enable customers to
access products and services through their preferred distribution or
transactional channels seamlessly.
As this new, post-crisis landscape starts to solidify, financial firms
will have to reflect on the space they plan to occupy. A Swedish bank,
Svenska Handelsbanken, for example, has been following the same
strategy—conservative, “boring”, relationship banking—for decades,
claims the bank’s CFO, Ulf Riese. Despite the crisis, it has achieved its
core strategic aim in every one of the last 42 years—to deliver a higher
return on equity than its peers. “But since 2008 the whole notion that
you could build a bank just on deposits is no longer true,” he says.
“New technology, especially mobile technology, means that if you have
a reputation problem, money can leave your bank very quickly. If you
are lending to people for five years and are funded with deposits, you
can be in trouble fast,” says Mr Riese. “That means for us, and banks like
us, bond funding will be increasingly important.”

Compliance: the new competitive
advantage?
Mr Riese believes the adoption of a planned European “bail-in” regime
would also be significant. The idea is that troubled banks in the EU
should have to ask their bondholders, shareholders and important

customers for help before they look for central bank support.
“Under bail-in, companies would have to do a form of credit assessment
on their bank,” says Mr Riese. “When I became CFO in 2007, nearly every
bank in Europe had the same funding cost, regardless of risk. The crisis
led to wide differentiation between banks—some could not even fund

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themselves. Bail-in will increase the differentiation between a very
good and not so good bank in terms of funding costs, especially when
central banks start to withdraw liquidity. For me, that makes my role as
CFO—meeting investors to explain the bank and how we think—even
more important.”
The work that Handelsbanken has done to comply with new regulation
could be helpful here, Mr Riese believes. “The amount of information
we have to gather nowadays is immense. From a practical point of
view it just tells us what we already knew, but one way in which it is
beneficial is that we now have so much statistical data that we can
give the market about our capital position. That means we can be
benchmarked against our peers in a much more granular way than had
previously been the case, and that is positive for us.”
When he is talking to investors and analysts, the clarity and consistency
of Handelsbanken’s strategy pays dividends, says Mr Riese. “I find
that we are the only ones in our industry who have not changed;
our business model is simple relationship banking. Other firms have
shifted their strategies so much over time that it’s not necessarily easy
to understand all the information they are producing.”
Indeed, at one point in 2008 Handelsbanken had a worse credit rating
than Kaupthing Bank, the Icelandic bank forced into government

receivership in late 2008. “Since then the market has become much
more sophisticated,” notes Mr Riese with approval.

Avoiding the complacency trap
Asset manager Schroders is another financial firm that has performed
well throughout the downturn. But it has still had to jump through the
regulator’s hoops, despite its large—£700m and growing—investment
capital surplus and £262.9bn under management.
The CFO of Schroders, Richard Keers, who joined the firm in May 2013,
says that Schroders has built better operational risk models and stresstested them to meet regulatory requirements. “One thing you can’t
do is say to regulators, ‘we’ve got a lot of capital so we don’t need to
worry’”, he says. “We need to demonstrate that we have a thorough
process that underpins all our capital modelling requirements. If
we were complacent and didn’t do it properly because we have a big
surplus, we would get censored quite strongly.”
Mr Keers says that Schroders has been investing throughout the crisis,
keeping costs under control—rather than trying to cut heavily—and
focusing on organic growth. Its £413m acquisition of Cazenove Capital
in 2013 was very much the exception rather than the rule.
The fact that the Schroders family still owns 46% of the business helps

the board to take a longer-term view, while being a FTSE 100 public
company also ensures that the governance framework is strong, he
adds. Its presence in Asia—which generated over half its net new
investment business in 2013—is one of the “jewels in our crown” and
there are plans to double the size of its managed funds in the US over
the next five years, says Mr Keers.
Still, the business is facing revenue-margin pressure, he says, as the
firms that distribute Schroders’s products are gradually consolidating
the partners they work with. “Revenue margins are decreasing, but the

risks we have to take are not. So we need to be more efficient and have
more robust processes,” claims Mr Keers. “We also need to make sure
we still have a cost base that gives us a very viable business model.”
Hence one of Mr Keers’s early priorities when joining Schroders was
to revisit its management accounting systems. “I want to ensure we
have much greater transparency about where we are incurring costs
and where we are generating revenue—by client product and by
geography,” he explains. “It’s been a very substantial project.”
Providing a higher degree of transparency around the performance
of the business is a theme that Mr Rennison highlights, too. “As the
leader of the finance community in a large organisation, I have to
ensure we challenge the way we allocate investment and deploy our
capital,” he says. “Are we using the right assessment criteria and
making an appropriate return, not just in financial terms but in terms
of benefit for our customers?”
This requires a careful balancing act. “Finance must absolutely
participate in that debate and challenge what people are doing, but
we must not dominate the debate,” says Mr Rennison. “Customer
service is our differentiator, and our regulators expect us to deliver
‘good outcomes’ for our customers anyway. So while we want to
drive financial discipline, we need to have an integrated approach to
strategy.”
The need to balance different priorities—of which finance is only one—
is a cultural attitude that Mr Rennison tries to instil in his team. It is
also one that he takes to the boardroom. “The integrated approach to
strategic planning is really important,” he says. “I am the CFO, but I am
not the sole owner of this and nor should I be.”
The financial companies mentioned in this article all had a relatively
“good crisis”. If the regulatory reforms introduced since 2008 have
encouraged their rivals to take a more rigorous, data-driven approach

to strategy, investment and capital allocation, then this can only be a
good thing. This approach should help them to grow and prosper, now
that the economy is improving.