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March 06, 2014 at 08:20 PM
Investors in the international banking sector would be well advised to keep informed, as many banks are reinventing themselves to keep up with a changing marketplace. While most, according to Fitch Ratings, continue to carry a stable outlook for the year to come, much depends on how well their efforts succeed. And the outlook for European banks in developed markets is “still negative,” according to the ratings agency.
David Weinfurter, global head, financial institutions at Fitch, said in the agency’s “Financial Institutions 2014 Outlook Compendium” that “below-trend economic growth in some markets, legacy asset quality issues, occasional sizeable legal and regulatory charges, and a shifting regulatory landscape all weigh on banks.” But there is a bright spot as banks take actions to cope with shifting demands: “[E]conomic growth—even if only modest—feeds incremental demand for credit and helps asset quality, while restructurings and business model refinements support improved fundamentals.”
While Weinfurter said the majority of country and sector ratings remain stable, challenges such as “ongoing regulatory change, central bank actions on rates and tapering, and selected emerging-market volatility” remain. Challenges notwithstanding, “we expect banks around the world to broadly continue improving capitalization, enhancing liquidity, managing leverage and addressing profitability.”
That’s not to say that the road ahead will be smooth. Fitch also broadly characterized the 2014 outlook for the 12 global trading and universal banks (GTUBS) as “Regulation, Resolution and Returns.” The 12 banks are Bank of America, Barclays, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs Group, HSBC Holdings, JPMorgan Chase, Morgan Stanley, Société Générale and UBS AG.
Here’s a look at how some of those challenges are playing out.
Royal Bank of Scotland, which in 2008 got the biggest bank bailout in history, racked up its largest loss since that bailout—9 billion pounds ($15 billion)—for 2013. It also handed out some 576 million pounds in bonuses for 2013. While down from 679 million pounds for 2012, those bonuses were plenty high enough to draw government reprimands.
RBS’s stock unsurprisingly fell after news of the loss. It has remained low since the bailout, preventing the British government from reducing the size of its 80% stake. The institution that CEO Ross McEwan characterized as “the least-trusted company in the least-trusted sector of the economy” still has a lot of suspicion to overcome in the marketplace.
McEwan, who took over from Stephen Hester last October, has gone further than Hester in reshaping the bank; Hester cut costs and reduced assets, but left before reducing the size of the investment bank at the government’s behest.
McEwan has tackled the investment bank, as well as combining units and shedding staff—with more staff cuts to come, perhaps as many as 30,000 altogether; that figure includes employees in units already on the auction block. When he’s done, the bank will have three units, down from seven. But even McEwan has said the bank could need another 3–5 years to fully recover. Analysts have said five years is more realistic.
Another factor that could influence the bank’s push toward recovery is Scotland’s forthcoming vote on independence. A yea vote could expose RBS to everything from changes in its credit rating to new regulatory requirements, as well as changing its position with regard to the European Union.
HSBC, meanwhile, has seen its own cost-cutting measures pay off, with profits expected to hit $24 billion—a nearly 20% increase for 2013—after slashing 40,000 jobs and selling or shuttering 60 businesses, among other actions, over the past three years.
