Over the next two years, the banking industry in most of the industrialized countries may see a further normalization of its business environment, with only moderate economic growth as well as significantly more expansive and rigorous regulation.
In Europe, 2013 could bring about a turning point for the better for banks, following a period of multiple burdens in previous years caused by the financial, economic and debt crises and the adjustments necessary to comply with a stricter regulatory environment. While a return to sustainable earnings growth will hardly be possible before 2014, the banking industry is likely to intensify its efforts to establish a leaner cost structure and achieve efficiency gains, which should lead to lower operating expenses. The pressure to increase capital ratios should slowly ease in light of the recent progress made in this regard, and banks should therefore gradually gain more leeway to invest in new business. However, raising profitability to an acceptable level should continue to be a major challenge.
At least a stabilization of the European lending business as a whole may be possible this year – although margin pressure is likely to increase in light of the very low interest rates. An upturn is more likely to occur in lending to companies rather than to private households, which in many countries are still suffering from continued high levels of debt, overvalued real estate markets and high unemployment. Deposit growth will probably remain low in 2013, but should benefit from an economic upturn in the following year. The recent increase in loan defaults should remain limited thanks to the low interest charges for many borrowers – assuming that there will be a gradual recovery of the European economy without any new negative shocks.
On the regulatory side, actions by the European Commission in 2013 will include proposals for structural changes to the banking industry along the lines of the Liikanen Commission Report. As a part of that, the introduction of elements of a split banking system for commercial and investment banking activities is under discussion. This could have profound effects not only for EU banks and the established universal banking model, but also for banks’ clients and financial stability. Individual member states, notably Germany and the UK, are also pushing for structural changes.
In the course of 2013, the Basel 3 reforms will most probably be codified into European law, which, as far as the revision of the Capital Requirements Directive is concerned, would be followed by implementation in the individual member states. The passage of the revised European Deposit Insurance Directive is also scheduled for 2013. The possible introduction of a financial transaction tax in a number of EU countries poses a particular risk to the European capital markets. Finally, the European Commission is also due to present a legislative proposal for a European bank resolution regime, which could have far-reaching consequences for banks and their creditors.
In the U.S., a major task for banks will be to maintain the very strong profitability levels they have reached again. A moderate recovery in the lending business should facilitate this, although almost no further momentum can be expected from declining loan losses. In addition, the extremely low interest rates could, in the medium term, turn out to be a serious problem for the interest margin. For the same reason, and due to the expiry of a portion of the previously existing deposit guarantees, the previously strong growth in deposit volume will probably let up noticeably. Furthermore, banks’ revenues and profits could also be impacted by measures designed to slow the rise in public debt levels.
With respect to new regulation, Basel 3 (including transitional provisions) will probably also be introduced in the U.S. for major banks in 2013. Passage could yet be delayed, though, by calls for another impact study. At the same time, work will continue on the implementation of standards introduced by the Dodd-Frank Act. For foreign credit institutions operating in the US, recent calls for local incorporation, with accompanying local capital requirements, pose substantial issues.
In investment banking, overall global revenues in 2013 should remain at about the same level as in the previous years. A slightly weaker activity in the markets for debt instruments may be largely balanced by a slightly better development in the origination and trading of equity securities (following a very weak result in 2012). At the same time, banks will probably continue in 2013 and 2014 their efforts to achieve a leaner cost base and some institutions could further reduce their range of products and services, which means that the gradual increase in the market concentration already observed in recent years could continue.
Asset and wealth management businesses’ performance may again be determined to a large part by capital market developments. As these are facing a cautiously optimistic outlook due to receding fiscal and macroeconomic concerns in Europe and the U.S., assets under management could grow moderately over 2013 and 2014, with flows by asset category reversing some trends of the past few years: equity funds might benefit from increased risk appetite, while bond funds may perform less well following significant recent price increases. Revenues may be negatively impacted, on the other hand, by competitive pressures which remain intense and by margins likely to shrink further, the latter being reinforced by a prolonged very low-yield environment.
Finally, numerous banks will continue to be faced with accusations of unlawful behavior and improper business practices. This may lead to (further) considerable financial charges as well as long-term reputational damage for the entire industry.