Unlocking Value: Lombard Lending in Modern Banking - Navigating Challenges and Opportunities
In the past decade, Lombard lending was one of the fastest growing loan products. Deloitte pioneered with a global Lombard lending benchmarking series involving over 40 banks covering USD 450 billion and 22 booking centres, to consolidate current market trends. The ambition to continue this growth was clearly confirmed. Yet, while banks transition the product from niche to mainstream, challenges are being addressed around strategic alignment, operational efficiency as well as digital transformation to cater for the next generations of wealth.
Strategic relevance of Lombard lending
Lombard lending (also called securities-based- lending (SBL) or margin lending), a dynamic financial product that allows individuals to leverage their assets for loans, is gaining prominence in the financial markets with a global market size of around USD 4.3 trillion, notably Switzerland, the USA, UK, Luxembourg, and Singapore. Since 2018, it has been one of the fastest growing credit products (by 5%-10% per year) compared to more traditional loans such as mortgages, and the Lombard lending business can contribute a significant share to the annual profit of wealth managers.
The growth in Lombard lending has been driven by several factors. Low-interest rates encouraged the reinvestment through leveraging liquid assets. Digitalisation and automation make loan processing faster, and so more accessible. Plus, the rise of the ‘Affluent’ demographic and active investing by a newer, more digital-savvy generation, has fuelled expansion and diversification.
Despite its essential role in Wealth Management, Lombard lending hasn’t yet received the same spotlight in optimisation efforts as other loan types. The evolution of the business in the past years hasn’t been without hurdles. The COVID-19 pandemic induced market correction stressed credit monitoring and margin call processes. Regulatory changes like the EBA Guidelines on loan origination and monitoring or Basel III and IFRS 9 in provisioning, caused additional requirements such as in credit worthiness assessments, necessitating quick process adaptation from banks involved in Lombard lending.
Exploring global trends in Lombard lending: Deloitte's benchmarking series
To better understand global industry trends, Deloitte has initiated a global Lombard lending benchmarking series, gathering insights from top-tier financial institutions. Over 40 banks currently participate, with a combined Lombard lending volume exceeding USD 450 billion across 22 booking centres worldwide (Figure 1). The participants highlighted current challenges such as strategic alignment, operational efficiency, digital transformation, as well as credit risk management. This blog will look more closely at three of these four topics derived from this benchmarking.
Figure 1: Overview of Deloitte’s Lombard benchmarking series coverage
Strategic alignment: Navigating growth and shifting client demands
Due to the rise in interest rates, over 60% of participants noted shifting priorities among clients requesting Lombard loans, moving away from only leveraging for investment, towards alternative uses such as for real estate or even tax payments. Despite continuing economic uncertainties, most benchmark participants are committed to continuing growth in their Lombard business with on average >5%. Facing increasing market competition and changing customer demand, strategic positioning and competitiveness become more important for sustainable success. Deloitte observes an average Lombard penetration rate (in relation to AuM) of around 6%, with a wide range from 0% to 25%, particularly highlighting untapped organic growth potential within many private banks’ existing client base (Figure 2). This still presents an opportunity for organic growth for many, potentially doubling or tripling the business.
Figure 2: Benchmark participants’ Lombard book in relation to assets under management [in %]
Operational efficiency: Ensuring competitiveness and a foundation for digitalization
In today’s competitive Lombard lending market, efficiency has emerged as a crucial factor for lenders seeking a competitive edge. For example we have observed notable differences in the activation time of Lombard credit limits, which has become more and more important for clients, ranging from intra-day activation of standard Lombard limits as best practice, to more than 10 days in activation time for lagging peers (Figure 3).
Figure 3: Benchmark participants’ time to loan activation for standard transactions [in hours/ days]
Through the benchmarking, we have identified several hurdles contributing to inefficiencies in Lombard lending. These include tactical topics like unclear policies (e.g. no clear definition of standard and non-standard requests with much room for interpretation), variations in approval processes and competencies (e.g. often still over-involved 2nd LoD Credit Risk Management or executive / committee functions in approvals), as well as differences between booking centres (e.g. heterogenous procedures / process logics or request documents and quality; non-competitive Lending Values; non-standardized margin call or crisis procedures). Drawing from Deloitte projects, we often identified in lending maturity assessments significant untapped potential of up to 40% in process speed and efficiency through tactical (non-IT) improvements addressing such challenges.
From a more strategic perspective, the underutilisation of technology in Lombard lending operations exacerbates inefficiencies even more. Manual processes (e.g. Word / Excel / E-Mail requests) and outdated systems lead to time-consuming tasks, increased error rates, and limited data accessibility. Embracing innovative technologies is crucial for enhancing operational efficiency, reducing processing times, and adapting to market change.
Figure 4: Benchmark participants’ loan book distribution of standardisation and limit size USD <2.5m
With the benchmark participants showing an average of 75% in standard loans (e.g. well diversified, liquid collateral, no exceptions, etc.) and most limits below USD 2.5 million (Figure 4), the Lombard market presents significant opportunities for digititalisation and automation, paving the way for real-time loan activation. 100% of participants unanimously agree on the absence of barriers to standardisation for a universal process across booking centres, making Lombard lending a prime candidate for centralisation and digitalisation, promising cost efficiencies End-2-End.
At the same time, upcoming new dynamic challenges like ESG / sustainability considerations, jurisdiction-specific documentation requirements, or shifting dynamics towards also allowing real estate equity, need to be considered. Such trends will add further complexity to the operating model for which it is advisable to prepare early.
Digital transformation: Preparing for the next generation and growth cycles
The evolving wealth distribution landscape, particularly towards the ‘Affluent‘ segment, intensifies the demand for digital solutions in Lombard lending. This shift not only reflects market responsiveness to emerging trends but also underscores the ripe environment for innovation and technological advancement. Over 35% of benchmark participants would even consider a securitisation through a refinancing partner and 25% of participants would consider a BPO platform in the future, instead of upkeeping the full infrastructure internally.
However, despite a clear demand for digital solutions, there still exists a significant gap, with 73% of participating banks lacking a digital banking offering for Lombard. In a first step, we see that End-2-End workflow tools are becoming a standard for internal processing, where many market players are currently undertaking the transition. Next, an even bigger need to catch up is evident regarding fully digital straight-through processing (STP) origination processes, often even enabling self-service and real-time mobile banking processes. In some markets, retail-oriented players (e.g. Robinhood, Swissquote) had a faster time to market with such Lombard offerings than incumbent Wealth Managers. But these established FSI are catching up quickly (e.g. HSBC or UBS who are offering digital Lombard solutions in certain geographies). A strategic implementation of digital offerings is therefore no longer a consideration but a necessary step to remain competitive. Deloitte is at the forefront of driving this transformative shift, collaborating closely with industry pioneers to design and implement such real-time digital application processes (Figure 5).
Figure 5: Example of a mobile self-service-Lombard Customer Journey realised by Deloitte
Conclusion
The growth in Lombard lending is undeniable, yet challenges persist. Our benchmarking has shown crucial imperatives for executives in this business: strategic alignment, operational efficiency, digital transformation, as well as credit risk management. With the likely stop or even reversal in interest rate increases, a potential re-leveraging and growth cycle with a new generation of clients is ahead mid-term, for which market participants should prepare now.
Deloitte stands ready to assist Financial Services Institutions with strategic guidance and innovative solutions enabling both competitiveness as well as resilience to credit risks in the Lombard lending business. Contact us to explore these topics further or to discuss the future of Lombard lending for you.
Curious to learn more? Mark your calendar for May 16, 2024, and secure your spot for our webinar. You will benefit from an overview of exclusive insights from the benchmarking results as well as a joint live discussion amongst industry experts on emerging topics such as sustainability considerations.
Authors
- Eric Gutzwiller - Director, Financial Services Transformation
- Lea Wirth - Manager, Financial Services Transformation
- Marco Ehrler - Assistant Manager, Financial Services Transformation
