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SOURCE Zacks Investment Research, Inc.
A synopsis of today's Industry Outlook is presented below. The full article can be read at
In order to plan the path to future growth, banks all over the world are seeking new strategies to lessen the regulatory burden. Almost every bank has its focus on capital efficiency. And most of the foreign banks are adopting reconstruction-by-asset-sale strategies to strengthen their capital ratios.
Self-protective efforts are significantly helping these banks to stay afloat, though at the cost of moderating top and bottom-line growth. Moreover, the industry remains thwarted by non-stop challenges that are keeping its performance muted.
The latest deterrents, nagging macroeconomic issues -- the European sovereign debt crisis in particular -- and regulatory pressures, are continuously taking a toll on the financials of many banks, resulting in the sector's underperformance.
As growth remains the primary focus of central banks, interest rates are not expected to increase at least in the next couple of years as inflation is not a major concern for most of the countries other than a few emerging economies. Thus, banks operating in a low interest rate environment will not be able boost revenue through interest income. On the other hand, non-interest revenue sources will be limited by regulatory restrictions.
Banks in emerging economies will, however, not face significant challenges related to interest income due to a not-too-low interest rate environment. Anti-inflationary measures of the central banks of these economies are expected to keep interest rates high. However, non-interest revenue challenges will persist.
Complying with stringent regulation is not a major concern for most of the banks, but it would be difficult to optimize business investments in the way banks run their businesses. So banks will need to reassess and restructure their operating models to be successful, which will take considerable time.
The Recent Past and Near Future
Despite a number of high-profile scandals, many of the world's largest banks were able to gain investors' confidence in 2012 as reflected by their share price performance. Many foreign banks, including giants like UBS AG (NYSE:UBS), Barclays PLC (NYSE:BCS) and HSBC Holdings plc (NYSE:HBC), ended the year with substantially higher share prices compared to the beginning of the year. Also, the MSCI World Bank Index increased more than 20% in 2012.
However, with respect to the financial health, less resilience was seen during the year than was anticipated. Growing challenges related to funding, still-high costs despite belt-tightening through layoffs and limited access to revenue sources kept bottom-line growth under pressure.
The upcoming quarters don't look any better, with several negatives hampering the sector like asset-quality troubles, high borrowing costs, steeper expenses and weak loan demand. But thanks to worldwide regulatory reform, the sector has at least entered a transformation phase with the restructuring efforts in place. Needless to mention, an essence of growth has yet to be felt.
On the Fundamental Side
Looking at the fundamentals, a rising risk-aversion tendency has still kept client activity slowed, resulting in weak trading volumes and subdued credit demand. Also, learning from past experience, banks are now more cautious about lending money.
Consequently, lower business activities and anticipated subdued profitability are making foreign banks less appealing to investors. Valuation multiples of these banks will continue to reflect the fundamental challenges at least through the first half of 2013.
The growth potential of some non-U.S. banks could be restrained by higher reserve requirements and outsized losses related to capital markets. But strict lending limits as part of the regulatory overhaul as well as greater transparency in regulations could strengthen the fundamentals of many sector participants. Eventually, these are expected to create a less risky lane for the overall industry.
As inter-country investment walls have fallen, some large non-U.S. banks are freely expanding beyond their domestic boundaries through mergers and acquisitions to utilize regional regulatory benefits. On the other hand, regulatory pressure to focus more on the home market is forcing some global banking giants to sell overseas assets. Accordingly, banks are trying hard to restructure their operating models and address funding needs.
While the sector saw a moderate recovery in 2010, the performance in 2011 was among the poorest in its history. Then in 2012, the industry came across a number of new difficulties. But a risk-averse approach helped it perform better than 2011.
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