For the banking industry, we expect the continuation of synchronous economic growth around the world in 2018, which should result in a favorable environment across all business segments. More importantly, activity levels in the capital markets have recently improved and key metrics like volatility have increased from historically low levels and are expected to continue to normalize in 2018. Additionally, the cycle of substantial regulatory tightening following the financial crisis is largely coming to an end with the conclusion of Basel III framework agreement and the implementation of the Financial Markets Directive (MiFID II) and the revised Payment Services Directive (PSD II) in Europe, and banks are expected to benefit from resulting greater regulatory clarity in 2018. Stability in the regulatory framework will permit more accurate planning with regard to both capital requirements and the economic attractiveness of various business lines. The greatest uncertainty for the industry is likely to stem from policy actions by key central banks that may terminate their asset purchase programs as well as a further normalization of interest rates in the U.S., which likely will have a significant impact on both the capital markets and the credit market. Additionally, the ongoing impact of technology in the banking industry will continue to be a theme in 2018 and beyond that will present both challenges and opportunities.
In the Eurozone, the outlook for higher capital markets revenues and lending growth is favorable, which may largely reflect continued good economic conditions and higher volatility levels in the capital markets. For households, the recent recovery in lending is expected to continue thanks to the favorable outlook for the labor market. In the case of corporates, low interest rates and greater economic growth and confidence will likely support growth in financing both through loans and capital market activities. The greatest near term risk to the Eurozone is a “hard” Brexit in which the UK departs the EU without a transitional or final agreement being reached clarifying the UK's future access to the European single market. Nonetheless, banks will likely see revenue and net income growth in 2018 as a result of the favorable macroeconomic backdrop.
German banks can expect growth in the lending and deposits, both for retail and corporate customers, as well as a continuation of the extremely low credit risk provisions. However, pressure on net interest margins from low interest rates will likely continue in 2018, the impact of which will be partly offset by volume growth.
In the U.S., the expectation is that the favorable business environment for banks will remain. The robust U.S. economy and the potential for further actions to ease regulation on U.S. banks will support ongoing revenue and net income growth in banking, capital markets and asset management. Net interest margins for U.S. banks are expected to benefit from further decisions by the Federal Reserve to raise its benchmark rate, although the extremely low credit risk provisions are also expected to increase moderately.
In Japan, the expected slowdown in economic growth and the end of the extraordinary monetary policy measures could result in lending and deposit growth cooling off. In China, the risks of a private sector debt bubble are expected to increase further, although the government remains steadfast in its willingness and ability to cushion major disruptions.
The Basel Committee’s revisions to the modelling approaches for RWA (“Basel III framework agreement”) were finalized at the end of 2017. This concluded one of the most significant revisions to regulatory requirements following the financial crisis. In 2018 the focus will shift to the start of an expected multi-year process of implementing the framework into law in the EU. As the process of implementing the Basel III framework begins around the globe, there remains the risk that implementation will differ in across jurisdictions and result in inconsistent impacts across regions.
In Europe, the implications of Brexit should become more clear through the course of 2018, with politicians in the UK and other EU members targeting an agreement on a transitional period by the end of first quarter of 2018 and a draft withdrawal treaty due to be ready for ratification by October. Increased clarity on the future relationship between the UK and other EU members should have a positive effect on banks operating in the region through the removal of uncertainty. At the same time progress should be made towards political agreement on key regulatory items that are outstanding, including updates to CRR, reviews of ESA’s and EMIR which should provide further clarity on the regulatory requirements for banks in Europe in the medium term.