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Americas Banks Americas Banks Banking on Technology the Shareholder Benefits of a Digital Future

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Americas Banks Americas Banks Banking on Technology the Shareholder Benefits of a Digital Future EQUITY RESEARCH | May 22, 2018 | 12:35AM EDT The following is a redacted version of the original report. See inside for details. Americas Banks Americas Banks Banking on technology The shareholder benefits of a digital future The benefits of innovation in the banking industry have largely either accrued to customers in the form of lower prices or added to the cost base of the banking industry with limited revenue benefits. We see the current wave of digitization, which is centered on electronic payments, straight through processing and AI, generating real scale and efficiency benefits for the largest US banks. The decreasing importance of a physical distribution network also appears to be driving market share concentration with the largest banks taking 6pp of deposit market share since 2008. We see these trends accelerating over the next five years and estimate that the largest banks could see 350bps of efficiency improvement increasing to 800bps if revenue growth is factored in. Tech companies continue to seek opportunities to expand into financial services given their brand and broad customer base. However, we see their focus on eliminating frictions in payments and expanding their offerings to the under-banked, which are likely to be better achieved through partnerships and JVs with incumbent players. Richard Ramsden James Yaro Sal Saroni Heath P. Terry, CFA James Schneider, Ph.D. +1(212)357-9981 | +1(212)902-1913 | +1(917)343-5320 | +1(212)357-1849 | +1(917)343-3149 | [email protected] [email protected] [email protected] [email protected] [email protected] Goldman Sachs & Co. LLC Goldman Sachs & Co. LLC Goldman Sachs & Co. LLC Goldman Sachs & Co. LLC Goldman Sachs & Co. LLC Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Goldman Sachs Americas Banks Table of Contents PM Summary 4 Low-cost tech improving efficiency 10 Scale matters - Tech looks to concentrate the US banking market 17 Large tech company (i.e., Amazon) and venture capital ambitions in the banking space 21 Appendix A: Sensitizing benefits from digital vs. third-party providers 24 Disclosure Appendix 25 Other contributing authors Willis Palermo Mohammed Moawalla Melissa Kuang, CFA Vishal Agarwal +44 20 7552-8394 +44 20 7774-1726 +65 6889-2869 +1(212)934-8377 [email protected] [email protected] [email protected] [email protected] Goldman Sachs International Goldman Sachs International Goldman Sachs (Singapore) Pte Goldman Sachs India SPL Note: The following is a redacted version of “Americas Banks: Banking on technology: The shareholder benefits of a digital future" originally published May 22, 2018 [39pgs]. All company references in this note are for illustrative purposes only and should not be interpreted as investment recommendations. 2 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 01 0100 0 01 00 11000 1 0100 0 01 00 11000 1 0100in 0numbers 01 00 11000 11000 1 0100 0 01 00 00 10 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 1 0100 0 01 00 01 00 11000 1 0100 0 01 00 11000OVERBANKED 1 0100 0 01 00 11000 1 0100 0 01 00 11000 1OVER 0100 0CASH 01 00 11000 1 0100 0 01 00 11000 01 0100 0 01 00 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 11000 1 0100 0 01 00 11000 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 1 0100 0 01 00 01 9% 00 11000 1 0100 0 01 00 01 0100 0 01 00 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 0100 0 01 00 11000 1 0100 33 branches The share of cash-based transactions in Nordic 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 1countries, 0100 0 where 01 00 the 11000 digital 1 transition 0100 0 is01 well 00 11000 11000The number 1 0100 of 0 branches 01 00 11000 per 100,000 1 0100 people 0 01 in 00 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 the US—above the global average of 28 and the underway. In the US, the share is 34%. 01mere 0100 16 0 in 01 Nordic 00 11000 countries 1 0100where 0 digitization 01 00 11000 has 1 0100 0 01 00 11000 11000 1 0100 0 01 00 00 10 11000already 1 0100spread. 0 01 00 11000 1 0100 0 01 00 11000 1A 0100TALE 0 OF01 00 TWO 01 00 ROTCEs 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 01 0100 0 01 00 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 11000 1 0100 0 01 00 11000 11000 1 >0100 7x 0 01 increase 00 11000 1 0100 0 01 00 11000 1 0100 0 01 - 00140bps 01 00 11000 1 0100 0 01 00 01 0100 0 01 00 11000 1 0100 0 01 00 11000 1 0100The 0 decrease01 00 11000 in developed 0100 0 market01 00 11000ROTCEs 1 since0100 The growth in branches per capita in the US since 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 1the 0100 financial 0 01 crisis, 00 11000due to weaker1 0100 revenue 0 01 00 11000 1950. The trend has started to show signs of margins and deleveraging... 11000reversing, 1 0100 with 0 branches 01 00 11000 per capita 1 0100 declining 0 01 11% 00 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 01 since 0100 2008. 0 01 00 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 11000 1 0100 0 01 00 00 10 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 1 0100 0 01+ 00140bps 01 00 11000 1 0100 0 01 00 11000STAGNATING 1 0100 0 01 EFFICIENCY00 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 01 0100 0 01 00 11000 1 0100 0 01 00 11000 1 0100…meanwhile, 0 01 00 11000 Nordics 11000 have 1 seen 0100 their 0 01 ROTCEs 00 11000 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 1grow 0100 140bps 0 01 over 00 01the 00same 11000 period, 1 0100reaping 0 the01 00 01 0100 0 0157% 00 11000- 65%1 0100 0 01 00 11000 1 0100efficiency 0 01 00 benefits 11000 of0100 digitization. 0 01 00 11000 1 0100 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 US bank efficiency ratios since the mid-90s, 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 REALLOCATING1 0100 0 01 00 11000 SPEND 1 0100 0 01 00 11000 01 largely0100 0flat 01 despite 00 11000 waves 1 of 0100 tech innovation0 01 00 11000 like 1 0100 0 01 00 11000 11000 1 0100 0 01 00 00 10 11000ATMs 1 and0100 online 0 01 banking. 00 11000 1 0100 0 01 00 11000 1 0100 0 01 00 01 00 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 1 0100 0 01 00 1100020% 1 0100 0 01 00 11000 01 A 0100 SCALE 0 01 GAME00 11000 1 0100 0 01 00 11000 1 0100The 0 share01 00 of 11000 DBS Group11000 Singapore’s 1 0100 0 tech01 00 budget 11000 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 1freed 0100 up 0by 01shifting 00 01 to lower00 11000-cost/more 1 0100 scalable 0 01 00 distribution platforms. The savings were able to 01 0100 0 01 00The 11000 difference 1 0100 between 0 01 average 00 11000 1 0100 0 01 00 11000 0100 0 01 00 11000 1 0100 be channeled to developing new products and 11000 1 0100 0bank 01 spending00 11000 on 1 tech 0100 and 0 that01 00 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 8pp improving efficiency. 11000 1 0100 0of 01 other 00 industries.11000 1 0100Banks 0 also 01 00 11000 1 0100 0 01 00 11000 1 0100 0 01 00 11000 01 0100 0 01 00outsource 11000 1less 0100 of this 0 01cost 00 (20pp 11000 1 0100 0 01 00 11000 11000 1 0100 0 01 00 00 10 11000 1 0100 0difference), 01 00 11000 with large1 0100 banks 0 01 best 00 11000 1 0100 0 01 00 01 00 11000 1 0100 0 01 00 11000 1 0100 0positioned 01 00 11000 to amortize 1 0100 it over 0 01 00 11000 BANKING 1 0100 0 01 WITH 00 11000 BIG 1 TECH?0100 0 01 00 11000 their expense base.
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