There is no doubt that every sector of the world is going through some difficult situations arising from the global economic crisis, and the banking industry is not an exception. The state of both the US and European banks have given analysts reasons to fear and doubt their level of performance throughout the year. You may wonder that the year has not gone that far, so why being concerned?
There are some factors that are worth considering:
- Everyone knows the place of China when it comes to business and recently, there have been great concerns about its economic growth.
- We are all witnesses to the persistently reduction of oil prices and its impacts.
- Loan growth and capital markets are suffering from close to zero interest rates.
All these have direct and indirect effects on the banking sector.
U.S. Banks In Trouble
Experts have predicted about 20% reduction in the average earnings of about six (US) biggest banks. This will lead to the worst earnings report since the last 10 years. If this turns out to be true, then, most financial sectors are in big problems because it is a general belief that banks generate about one third of their annual revenue within the first quarter of the year. The first few months are important as a decline in them can make such companies struggle throughout the year to balance up.
Investors are always on the lookout for published reports from banks to determine their next line of action. This is because most banks have not found it easy generating revenues as they have been struggling. The effect of this is felt on the high cost of doing business; a special concern for investors and business owners. While the bank seems to be the present concern, other areas are likely to be affected too. Both bank executives and other analysts have concluded that if the first quarter has been ugly, there is no possibility of making it up in the second half.
Most bank executives have been educating their customers and investors on the possibility of decline in loans especially in the energy sector as well as in investment banking. This is a way of preparing the minds of their investors for any eventuality. The greatest concern has been the decline from previous years’ revenue, and since the economy is getting worse instead of better, there is the possibility of persistent downward trend. One obvious reason for this is the volatility experienced in stock prices, which have invariably plunged prices of commodities, leading to drying up of trading volume. Despite the fact that most US banks had tremendous experience in March, the trading result was not enough to take care of the previous two months decline. The capital market has been weak, and this has been predicted by analysts to extend to the second quarter of the year.
European Banks Struggle With Profitability
If you think that only U.S. banks are affected, then you need to observe European banks. Factors such as negative interest rates, perplexing economies as well as various regulatory systems have been affecting the viability of banks here causing a drop in market values. It is obvious that the profitability of most European banks has been affected by poor interest rate situation. This is going to be a considerable factor for regulators when the next rules will be drafted.
A good example is Deutsche Bank known to be the most active participant in the sale of European bonds. Deutsche was initially the leader in Europe, but then dropped to the 4th position in the last 2 years. Last year, it was the 14th biggest bank in Europe, only to drop to the 20th position in 2016. This decline in position of banks is an indication that the sector is having some challenges, and this is a great concern for investors.
According to the chief executive of Deutsche Bank, the legal and restructuring costs have affected their levels of profitability so far. While you may think only Deutsche bank is alone in this mess, Barclays has predicted the awful state of its investment income to be worse than previous ones. While we have considered both US and European banks in this article, the question is are other banks in other parts of the world having similar experience? For how long will this trend continue? While we cannot answer this question now, time will tell.
Meantime, prudent investors better make sure their savings and retirement plan are kep in much safer institutions.-----