21 September 2017
Peter Farley

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Peter Farley - Finastra

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Banks should beware potential electric shocks

05 July 2017  |  5599 views  |  0

A new report from Stanford University economist Tony Seba claims that no new petrol or diesel cars, buses or trucks will be sold anywhere in the world within the next decade. If this occurs, as people switch to ride-sharing and electric vehicle (EV) ownership, demand for oil is forecast to slump by a third to 70m barrels a day – which could see the price halve from current depressed levels to around $25 a barrel. It’s a downturn that could prove seriously damaging for banks and any other businesses that have not heeded warnings to modernise.

Seba’s report (Rethinking Transportation 2020-2030) foresees a dramatic fall in the price of EVs in the next five years to around $20,000 for low-end vehicles. This, combined with extended battery range and lifetime guarantees due to minimal moving parts (a Tesla only has 18, a hundred times fewer than a combustion engine) will accelerate demand. This would also mean virtually zero maintenance costs and a potential vehicle life of up to a million miles.

It’s a “perfect storm of converging technological trends” similar to the emergence of digital photography and the subsequent destruction of Kodak, whose executives saw the threat coming but underestimated its speed or impact. So why should banks worry?

Well, for starters one of their biggest customer groups is the oil companies, which are already strained as more than $100 billion of the $3 trillion debt that they owe is close to maturity – and for which they are struggling to find refinancing. With cash flows already damaged by an oil price hovering around $50 a barrel, if it halves again this will only get worse.

The bigger picture is more serious, with the industry thought to owe a collective $3 trillion, triple the levels of only 10 years ago, and the four biggest oil firms alone in debt to the tune of nearly $200 billion (this has doubled in the past couple of years). Automakers are not far behind, with Ford and GM’s combined debt close to $200 billion, with large amounts tied up financing auto purchases.

Many countries heavily reliant on oil exports that have not diversified with the benefits of past oil booms, such as Saudi Arabia, Russia, Nigeria and Venezuela (the latter already facing economic meltdown) will also all face serious monetary pressures. It would be interesting to know how much of this scenario bank regulators are factoring into bank stress tests should defaults occur.

Banks themselves might be the least of people’s worries if this scenario unfolds. However, for banks this forecast is just another reminder to sharpen the focus on more potential business disruption that hits revenues and profits and to prepare for yet another scenario that will require them to be leaner, more agile and forward thinking.

Just as with automakers, it seems likely that both the potential threat to banks and their possible salvation will come from next generation technology. If banks don’t embrace IT transformation, with digital-led, platform-based and much more highly automated business models that can better weather these potential storms, it won’t be long before they regret their complacency.

 

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Peter focuses on the market dynamics and industry challenges that drive IT investment priorities in the Capital Markets.

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