The pandemic effects of credit losses and provisions are set to weigh down banks for quarters to come. That provides fuel for consolidation – but not necessarily banks disappearing.
«Once again, banks displayed stability as a pillar of our economic system, especially robust in crisis,» the Swiss Bankers Association boasted at their annual meeting on Tuesday. The economic squeeze hasn't yet led to a banking crisis, as finews.asia reported and consultant Ralph Kreis.
«Financial services is so far withstanding the crisis a lot better than other industries,» Kreis, who is responsible for banks and insurers at Alix Partners, said at a media event. As half-year results for domestic firms show, it's too early to declare victory.
Luxuriantly Prepared
Several trends are eating away at profitability in the industry, which is also facing several fundamental questions over its future – and who will be a part of it. «Consolidation will pick up dramatically especially for subcritical providers,» Kreis predicted. But that may not lead to banks disappearing entirely.
The reasons for banks' rude health right now has to do with factors out of their control. Most lenders are more luxuriantly capitalized than ten years go – in Europe, the average core capital has doubled to 12 percent.
«Capital Melting»
Their sturdiness is a result of the financial crisis of 2008/09 and regulatory orders. Fast forward to 2020: banks' supply chains are largely uninterrupted and most of their services were in demand throughout the shutdown in large parts of the world.
Banking is coming off the heady days of March and April when they were enlisted to open the nozzle on a $40 billion emergency loan scheme for Switzerland's small- and mid-sized businesses. The industry also shone in sending its staff home to work remotely.
Spending Vs Investment
That's not to say half-year results are unblemished: write-downs and provisions for loan defaults marred most bottom lines, and some – like BNP Paribas' Swiss arm – swung to a loss. «Capital buffers are melting, and need to be rebuilt after the crisis,» Alix's Kreis noted.
The challenge of doing so – amid negative interest rates and tepid interest from companies as well as investors – is immense. The other option (cost-cutting) is set against looming and much-needed infrastructure and primarily technology improvements. In short, banks need to rethink where exactly they can genuinely afford to spend money.
Cooperating Vs Selling
That will fuel a new breed of consolidation, according to Alix: banks won't necessarily merge or sell, but they will ditch certain offerings. In order to not abandon these activities altogether, they are likely to win specialized providers. «Consolidation is looked more like partnerships and less like traditional mergers and acquisition,» Kreis said.
Credit Suisse is a prominent example: the Swiss bank last month merged a regional bank it had managed at arm's length for years. The move is a bid to save money and become more efficient and is accompanied by roughly 500 job cuts, and branch closings.
Bank Utility Revival?
Cooperations are popping up in technology and newer business models: several banks are trying out so-called ecosystem approaches, showing a willingness to tie up with competitors rarely spotted before the pandemic hit.
The industry has also finally agreed to an open banking standard, though this has yet to make a vast impact. Lenders have also been less squeamish about cooperating on cryptocurrency, for example. Banks will increasingly seek so-called industrial utilities for their decentralized processes, according to Kreis.
