How does the banking industry look as we enter a new decade? It’s worth taking a look back at the one that just finished before we do that.
January 2010 was still the worst of times for banking. It’s easy to forget now that, two years after the onset of the global financial crisis, the entire concept of the industry seemed to be at risk. Europe had caught the crisis bug later than the US and its banks eventually suffered much more. Those were extraordinary times.
Thankfully the worst is now behind us, but as 2020 dawns there remain serious challenges to nearly all banks, as well as some still extraordinary episodes.
Here’s one that sticks out: at the end of 2019, Euromoney was talking to a senior Swiss private banker. Switzerland has been struggling with negative rates for some time now and banks have started charging their higher net-worth customers for holding deposits. In uncertain markets, clients aren’t that keen to put their money to work.
So, what’s the best investment in this environment? Cash.
A lot of rich Swiss people are moving their money into banknotes and, if not quite hiding them under the mattress, at least not putting them anywhere near a bank that wants to charge for having money on deposit. It recently reached the stage, this banker says, where the Swiss National Bank began to worry it might not have enough notes in circulation.
So much for the cashless society.
Negative rates are a big challenge, especially in Europe and Japan. Let’s go back 10 years again. Remember when banks were all looking to stack up on deposits as a cheap source of funding and a sign of strength? Today, if you live in a negative rate environment, having more deposits than loans is a cast-iron way of losing money.
So, the mantra for now among bank chief executives is to have matched books. Try to put as many of your deposits to work as you can. Banks at their core make money from the spread between money they are given (deposits) and money they give out (loans). At a 100% loan-deposit ratio, it really does not matter if the deposit rate is -0.5% and the loan rate is +1.5%. It’s the same margin as if the respective rates were 5% and 7%.
What remains to be seen is whether or not this push to put deposits to work will eventually lead to a rise in non-performing loans, especially as the banks struggling with negative rates are also the ones coping with struggling economies.
Never before have we seen such a sustained influence of geopolitics on business confidence and financial market sentiment- Viswas Raghavan, JPMorgan
In this edition, Euromoney again takes a close look at the performance of 25 banks that we think, combined, give a good picture of the health of global banking. It makes for an interesting review.
Banks are doing less with more. Only one bank reduced its total assets over the first nine months of 2019 – UniCredit, which was selling businesses in that period. Collectively, the banks grew their assets by 5.5% over the same period in 2018.
But the performance of the assets was poor. Aggregate revenue was up 1.1%, but 11 of the 25 banks saw revenues fall. Both return on assets and return on equity fell at more than half of the 25. Aggregate profits were down 2.7% and individual profits fell at 12 of the 25 banks we review.
Return on equity has been a sore point for the industry for more than a decade, and there’s little sign of it improving. As Jean Pierre Mustier, chief executive of UniCredit and one of the sagest commentators on the banking industry, tells us this month: “Banks risk becoming value traps. ROE goes down as the ‘E’ goes up. As a standard return on tangible equity target for the industry, 8% is the new 10%.”
It’s hardly the most encouraging message to give as you set out a new four-year strategic plan for your bank, as Mustier did in December 2019.
However, perhaps the biggest threat to banking in 2020 relates to things out of the industry’s control. It’s easy to forget sometimes just how integral the industry is to all business – perhaps only technology comes close to matching it.
If the world does well, banking tends to do well too. If it does badly, banks suffer (and of course, as 2007/08 and its aftermath taught us, if banking itself does very badly, it can blow up the rest of the world too).
As Viswas Raghavan, chief executive for EMEA at JPMorgan, which is unarguably the most powerful bank in the world today, tells us this month: “Never before have we seen such a sustained influence of geopolitics on business confidence and financial market sentiment.”
It doesn’t suggest we are about to embark on a new roaring 20s. For banking, a gentle murmur is probably in everyone’s best interests.