Banks ponder the meaning of
life as Deutsche agonizes
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[October 10, 2016]
By Carmel Crimmins and Olivia Oran
WASHINGTON
(Reuters) - It wasn't just Deutsche Bank that was grappling with big
questions about the future at the International Monetary Fund meetings
in Washington last week.
The German bank is scrambling to overhaul its operations as it faces a
multi-billion dollar fine for selling toxic mortgage-backed securities
in the United States.
But many others in the banking industry are also still figuring out what
they should be doing, nearly a decade after the financial crisis, as
they grapple with anemic economic growth, wafer-thin returns on lending
and the possibility that regulators will further hike their cost of
doing business.
“This new world of low interest rates and even negative interest rates
is something that is very difficult,” said Frederic Oudea, the chief
executive of French bank Societe Generale.
“It is a game changer, not just for banks but for the whole financial
industry,” he told an audience from the Institute of International
Finance (IIF), a trade group for big banks that holds its annual meeting
alongside the IMF.
Deutsche Bank’s immediate obstacle is the U.S. Department of Justice's
demand for a massive fine over the sale of bad mortgage bonds that could
far exceed the 5.5 billion euros ($6.2 billion) in provisions that the
bank has set aside. Such a bill could require it to raise more capital.
But Deutsche Bank’s fundamental problem is that its large investment
banking business doesn’t fit the post-crisis era.
Chief Executive John Cryan is in the middle of an overhaul, cutting jobs
and selling assets. But with interest rates showing no signs of lifting,
he needs to move fast.
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Since the crisis of 2008, banks on both sides of the Atlantic have
shored up their defenses against future losses, adding hundreds of
billions of dollars in equity capital and shedding loss-making assets.
Sergio Ermotti, the chief executive officer of Swiss bank UBS, said
those defenses had proved their worth in recent weeks when other
European banks were largely insulated from the lurch in Deutsche Bank’s
shares.
But with rates expected to stay lower for longer, more banks will be
under pressure to change with the IMF warning last week that lenders in
Germany, Italy and Portugal needed to take urgent action to address old,
non-performing loans and bloated, inefficient business models.
“Crisis is the wrong word. We are in the middle inning of the reshaping
of the financial landscape,” said Mark McCombe, global head of
institutional client business at asset manager BlackRock.
THE MEANING OF LIFE
U.S. bankers attending the IIF meeting were far more upbeat than their
European counterparts.
JPMorgan Chase CEO Jamie Dimon, Morgan Stanley head James Gorman and
Citigroup boss Michael Corbat, did their version of the "Three Amigos,"
taking to the stage together to talk up the strength of the U.S.
consumer and their own roles in the global economy.
In a separate session, Goldman Sachs Group President Gary Cohn said the
U.S. banking system was in the "best shape it has ever, ever been by
far."
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A statue is pictured next to the logo of Germany's Deutsche Bank in
Frankfurt, Germany September 30, 2016. REUTERS/Kai Pfaffenbach/File
Photo
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Like their European rivals, many U.S. banks are struggling to get
shareholder returns above their cost of capital, but they are making
more progress because they wrote off larger portions of their bad loans
earlier – enabling them to return to growth more quickly – and most of
their crisis-era litigation costs are behind them. The U.S. economy is
also improving at a faster clip than Europe.
“Is it sustainable for any sector to have a return on equity in the
long-term that is below what shareholders expect? I don’t think so.
Shareholders have been, so far, relatively patient. We should aim to
sort out what can be sorted out,” said Oudea.
Britain's vote to exit the European Union, known as "Brexit," is another
headwind facing international banks, with the UK financial industry
risking a loss of up to 38 billion pounds ($48.34 billion) in revenue if
the country has only limited access to the European Union's single
market, according to one study.
"The big winner for Brexit will be New York; you'll see more business
moving to New York," Gorman said at the IIF meeting.
The competition from technology companies in banks' traditional markets,
such as lending and payments, has also ramped up the pressure to change.
In the pre-crisis days, banks would have merged to cut costs, but
regulators are now much less in favor of allowing the creation of big,
cross-border lenders which could disrupt markets if they got into
trouble.
Instead, banks are left to swing the ax where they can and ideally build
big market positions in areas that are not penalized by big capital
charges, such as consumer lending and asset management.
“The transformation process is still ongoing and it is painful," said
Alex Manson, global head of transaction banking at Standard Chartered
Bank. "But the quicker you can define what it is you stand for, the
quicker you can go to execution from meaning of life mode.”
($1 = 0.8928 euros)
(Editing by Bill Rigby)
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