Stop be­ing sur­prised by weak bank earn­ings

The Pak Banker - - OPINION - Mark Gil­bert

CALL it the new nor­mal for Euro­pean bank earn­ings. Stan­dard Char­tered shares plunged by the most in more than three years on Tues­day af­ter the bank posted a "sur­prise" 2015 pre­tax loss of $1.5 bil­lion, some­what dif­fer­ent from the $1.37 bil­lion av­er­age profit es­ti­mate from 20 an­a­lysts. On Mon­day, HSBC de­liv­ered a "sur­prise" fourth-quar­ter pre­tax loss of $858 mil­lion, rather than the ex­pected profit of $1.95 bil­lion. On Jan. 28, Deutsche Bank "sur­prised" bond in­vestors with a fourth-quar­ter net loss of $2.3 bil­lion, less than two weeks af­ter tap­ping them for $1.75 bil­lion of funds.

As the say­ing goes, fool me once, shame on you; fool me twice, shame on me. But fool me three times and maybe I should just re­sign my­self to be­ing a fool, at least where Euro­pean banks are con­cerned. The un­palat­able truth is that the bank­ing model is bro­ken. The days of gen­er­at­ing gobs of cash from "so­cially use­less" fi­nan­cial en­gi­neer­ing, as Adair Turner put it in 2009 when he chaired the U.K. Fi­nan­cial Ser­vices Au­thor­ity, are over. Be­cause banks have to hold more cap­i­tal for a rainy day, they have less money to play with in fi­nan­cial mar­kets. And they're still shrink­ing their trad­ing desks, fur­ther curb­ing their abil­ity to make money from mar­kets.

Im­por­tant aspects of Europe's reg­u­la­tory back­drop re­main foggy at best; the Euro­pean Union's Mar­kets in Fi­nan­cial In­stru­ments Di­rec­tive, new rules cov­er­ing a mul­ti­tude of mar­kets from de­riv­a­tives to bonds, has been de­layed by a year to 2018. But it's clear that the EU is seek­ing to keep fi­nan­cial in­sti­tu­tions from so-called casino bank­ing as much as pos­si­ble.

Pro­vi­sions for Euro­pean bank loans to oil and gas com­pa­nies are likely to climb -- my Gad­fly col­league Lionel Lau­rent notes that HSBC took a $400 mil­lion hit on those loans this week -- fur­ther crimp­ing profit. And there seems to be no end to the fines be­ing paid for rig­ging mar­kets, with set­tle­ments for fak­ing prices for gold, sil­ver, plat­inum, pal­la­dium and de­riv­a­tive-mar- ket bench­marks still loom­ing. As an­other say­ing goes, a bil­lion here and a bil­lion there and pretty soon you're talk­ing about real money. So it's lit­tle won­der that Europe's banks have lost about 30 per­cent of their value in the past year:

More­over, there's scant prospect that an im­prove­ment in the eco­nomic back­drop will make life any eas­ier for the banks. Bank of Eng­land Gov­er­nor Mark Car­ney pointed out in tes­ti­mony be­fore the U. K. par­lia­ment's Trea­sury Com­mit­tee on Tues­day that even though post-cri­sis bal­ance sheets are more ro­bust, the in­dus­try hasn't de­vel­oped a strat­egy to cope with the cur­rent en­vi­ron­ment:

The fun­da­men­tal con­cerns are about the re­turns of th­ese in­sti­tu­tions. Many of th­ese in­sti­tu­tions have not de­vel­oped the busi­ness mod­els that are con­sis­tent with a low growth, low in­ter­est rate en­vi­ron­ment, and con­sis­tent with mak­ing re­turns that share­hold­ers ex­pect un­der the new reg­u­la­tory con­struct.

Cen­tral bank in­ter­est rates at near or below zero de­liver cheap money. But longer-term rates also at record lows and in many cases below zero (five-year Ger­man govern­ment bonds yield -0.33 per­cent) mean banks can't bor­row cheaply and profit from lend­ing to their cus­tomers at in­flated rates. And the fu­tures mar­ket says the Euro­pean Cen­tral Bank will drive its bench­mark rate even fur­ther into neg­a­tive ter­ri­tory when it meets next month. There's a strong ar­gu­ment to be made that the post-cri­sis back­lash against banks and bankers is hav­ing the un­in­tended con­se­quence of mak­ing the fi­nance in­dus­try less fit for pur­pose, not more.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.