Recovery of banking industry runs up against fundamental challenges

The recovery of the global banking industry slowed considerably in 2010. The industry’s market capitalisation, following a 55 per cent jump in 2009, grew by only 10 per cent in 2010, while its total shareholder return (TSR) fell from 47.1 per cent to just six per cent, according to a new study by The Boston Consulting Group.

There were some bright spots, however, particularly in emerging markets. Banking TSRs were significantly higher than the global average in Latin America, Central and Eastern Europe, and the Middle East, and five of the ten largest banks in the world, measured by market capitalisation, are from emerging markets — four from China and one from Brazil.

Banks in developed markets continued to make progress. For the first time since the crisis began, each of the 10 major banking markets in the BCG study had positive after-tax return on equity (ROE). Switzerland, Canada, and Australia topped the list. On the whole, however, the results suggest that strong performance has become much harder to achieve and sustain in the post-crisis world.

“For many in the industry, this comes as no surprise,” said Lars-Uwe Luther, a BCG partner and co-author of the study. “As remarkable as the post-crisis turnaround was, much of its momentum came from the sheer size and speed of the industry’s downfall. There was bound to be a letdown after the industry bounced back from its low point.

“But there are other, more fundamental forces at play,” Luther noted. “The ‘new normal’ is more than a catch phrase.”

In 2010, the global banking industry doubled its ROE from 4.8 per cent to 9.6 per cent and increased its profits by more than 130 per cent, from $ 166 billion to $ 386 billion. But the industry made less profit in 2010 than it did before the crisis, while its equity base has grown significantly. It swelled from $ 2.6 trillion in 2006 to $ 4.2 trillion in 2010 — an increase of more than 60 per cent.

“The competitive dynamics that we envisaged two years ago seem to be taking hold,” Luther said. “Business models are being retooled to reflect a more cautious, more highly regulated, and less risk-oriented environment. There is a stronger focus on transaction, processing, and fee-based activities, rather than on complex, high-margin products.

“The environment is bound to remain difficult for some time. In certain markets, banks are still dealing with high levels of toxic assets and underperforming loans, while banks in nearly every country are facing a tremendous amount of regulatory change and uncertainty. Basel III, in particular, seems certain to prolong the pressure on profitability by putting a higher price on risky activities and imposing strong capital and liquidity requirements.”