In 2014, the banking sectors in many advanced economies could see a return to modest revenue growth in line with a continuing broader economic recovery. Business model adjustments for a variety of banks – including traditional investment banks, banks in former credit-boom countries and banks that received government bailouts during the financial crisis – should continue for the time being but may be largely completed in 2015.
Commercial banking in Europe might see a return to moderate loan growth and some normalization of loan losses, supporting bank profitability. The rise in capital ratios may slow once the new equilibrium based on the Basel 3 framework (including a number of specific surcharges) has been reached. On the other hand, interest rates may remain extremely low, putting continuous pressure on banks’ net interest income as well as on deposit growth. Furthermore, competition from non-bank providers is likely to increase, e.g. in payment markets and from foreign banks expanding their European franchises. Overall, profits may rise, although many banks might still struggle to see healthy, sustainable returns again soon.
Commercial banking in the U.S. could be supported by credit growth finally picking up, while loan loss provisions might start to increase from their currently extremely low run rate. U.S. banks will also have to build up some more capital to comply with the new, tighter rules. Deposit growth may continue to be solid, provided interest rates normalize further. Overall, profitability levels will probably remain strong, although growth should now be significantly harder to achieve than in the past few years.
Capital market businesses in 2014 may see an ongoing process of commoditization of parts of the business, a further decline in margins and growing competition from emerging market players, not only in their home countries. However, with global economic activity gaining momentum, gross transaction volumes are likely to increase virtually across the board. As investment banks adapt to new regulatory requirements that make a number of market segments considerably less attractive, this may lead to a new wave of market consolidation and concentration. All in all, this year’s total investment banking revenues may show moderate growth, with the fixed-income segment (including trading) shrinking slightly further, while equity capital markets (including trading) may be expanding again and M&A advisory also improving on a relatively poor 2013.
With respect to asset and wealth management, the outlook for the major equity markets remains cautiously optimistic as the global economy continues to recover, potential temporary setbacks notwithstanding. At the same time, with the Federal Reserve having started to scale back its Quantitative Easing program, bond yields are likely to rise further.
Concerning new developments in the field of regulation and supervision, the most important changes for the EU banking industry in 2014 may come from the European Banking Union being set up with the Single Supervisory Mechanism, the Single Resolution Mechanism, the gradual formation of a Single Resolution Fund and possibly a further integration of national deposit guarantee schemes. Prior to that, the comprehensive assessment and stress testing of large banks’ balance sheets will probably attract considerable attention. In addition, the focus in Europe is likely to be on the discussion about the introduction of a binding leverage ratio, the debate about potential structural requirements to separate certain banking activities in the context of the “Liikanen proposals” and the intended adoption of a financial transaction tax in a number of countries. In the U.S., the further implementation of the Dodd-Frank reforms will be crucial, as well as the implementation of the Basel 3 capital (and liquidity) rules.