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It is more than seven years since the height of the financial crisis, but the run of disastrous banking news during the past few weeks has revived bad memories. Profit warnings, mass job cuts, share price plunges and defensive capital raisings have abounded.
With the aftershocks of 2008 still hitting the global economy — and central banks in the US and UK shying away from normalising ultra-accommodative monetary policies — banks, formerly seen as the powerhouses of growth, are under pressure on every side. Regulation is piling up. Competitors are stealing business. And many lenders are shrinking fast. Is banking in terminal decline?
It is certainly in turmoil. Hit by challenging markets and onerous post-crisis regulation, bank profitability has been squeezed hard. Today, even JPMorgan Chase, the most profitable Wall Street bank on recent performance, generates a return on equity of just 12 per cent. That compares with the industry average of about 25-30 per cent pre-crisis.
A decade ago, investors would have slammed JPM’s chief executive Jamie Dimon for such a dismal return. Goldman Sachs, another of the banks that has prospered relative to rivals, suffered a near 40 per cent slump in third quarter net income. Goldman’s ROE is now just 7 per cent.
There are three simplistic schools of thought about what is going on. The first theory is that this is just a blip induced by excessive regulation; the second, that it is merely a return to normal after an exceptional pre-crisis boom; the third suggests the slow death of banking.
Many bankers see evidence of the first theory in Europe, where politicians and regulators have recently signalled a willingness to relax certain new rules, for example regarding the obligatory “ringfencing” of retail banking from riskier investment banking in the UK. “One of the things that European [policymakers] have done, which is quite damaging to the infrastructure, is reining back the European investment banks,” says Colm Kelleher, investment banking chief at Morgan Stanley.
Other bankers cling to the second argument — that we are experiencing a healthy return to normal. Sergio Ermotti, chief executive of UBS, says: “When we look back to the mid-90s [and] over the last 15 years, we saw a lot of banks doing a me-too strategy, trying to be everything to everybody, changing their DNAs, doing things they weren’t equipped to do. [That] was the anomaly.”
UBS has probably gone further and faster than any other bank to focus on its strengths and ditch businesses that are no longer economic, cutting half its assets and a quarter of its staff since 2007.
“The banking model is in many ways getting more like we’re turning the clock back to the early 1990s,” agrees Philipp Hildebrand, former head of the Swiss National Bank and now a senior executive at asset manager BlackRock. “When the history books are written, the aberration will not be the past crisis but the 15 years running up to 2007.”
The third, and most extreme, thesis about the mayhem in banking — that much of the industry is now in terminal decline — is peddled by those who are challenging banks’ traditional ways of doing things. Peer-to-peer or marketplace lenders — online platforms that match lenders with borrowers — are one of several upstart fraternities that believe they can steadily chip away at many of the banking industry’s longstanding functions.
“Clearly banks are under attack on multiple fronts,” says Renaud Laplanche, chief executive of the world’s biggest P2P platform, San Francisco-based Lending Club. “In credit, there is market-based lending. In payments, PayPal is [dominant]. In asset management, you have all the robo advisers. There is a massive competitive threat from tech companies.” The main advantage that new challengers have, says Mr Laplanche, is straightforward: they are unencumbered by old expensive systems, and new regulatory overheads. “Our operating cost is 2 per cent of assets compared with 7 per cent at a typical bank,” he says.
Business among these kinds of challengers is booming as a result. Giles Andrews, who heads the world’s oldest P2P business, UK-based Zopa, says lending volumes are doubling every year. with much of that business stolen from banks and credit card companies. “In consumer credit,” he says, “we’ve got a real chance of getting to 20 or 30 per cent market share in about five years.”
A host of other traditional bank activities are under attack, too. The advisory side of investment banking has boomed recently, but even here there are challengers, as lightly regulated boutiques take an ever larger chunk of merger and acquisition business from the big banks. According to Dealogic, small independent boutiques accounted for 16 per cent of M&A deals in 2014, doubling from 2008.
At the same time, the banks’ trading floors — some the size of football pitches — are operating well under capacity. Thousands of traders have been laid off as regulation has barred them from casino-style proprietary trading and other speciality operations have been rendered too capital-intensive. The best have found work in hedge funds. Many others have found their niche skills are obsolete.
Traders — in particular specialists in exotic derivatives — were widely blamed for triggering the financial crisis. The growing aversion to them is reflected in the new leadership of the world’s big banks.
In the aftermath of the financial crisis, the heads of nine global banks — UBS, Credit Suisse, Deutsche Bank, Barclays, Royal Bank of Scotland, Morgan Stanley, Citigroup, Goldman Sachs and HSBC — were all traders.
Now only Goldman’s Lloyd Blankfein and HSBC’s Stuart Gulliver remain. More pedestrian retail or commercial bankers are now in vogue. One group — Credit Suisse — has even taken the unusual step of sourcing its new chief executive from outside banking altogether. Tidjane Thiam is a former McKinsey consultant and insurance executive.
If banks’ top echelons are changing fast, that is nothing compared with the upheaval at the bottom. Once the career of choice for nearly one in five MBA graduates, banking has been usurped in the popularity stakes by the likes of technology and consultancy, with barely one in 10 now selecting it.
“Talented people don’t want to be bankers any more,” says the head of one top investment bank. “The quality of people has fallen. All of the good ones are going to boutiques, to non-bank financial companies, to technology companies. There is a drain of talent and a lack of innovation.”
Across 28 western nations, data compiled by SNL Financial show the tally of bank employees fell by 5.5 per cent between 2010 and the end of last year.
Besides the industry’s image of being under attack from upstart competitors on the one hand, and regulators on the other, the financial appeal has waned, too.
According to PwC, the average investment bank employee earned less than £200,000 last year. That is still more than four times the average across a selection of equivalent financial, industrial and consumer jobs but the level has shrunk by a fifth since 2010, while remuneration in other professions has been stable.
Many of the trends in banking apply globally, but the turmoil is clearly the most extreme in Europe.
Worldwide, total banking assets have continued to grow — rising 10 per cent over the four years to the end of 2014, according to data on 164 countries collated by SNL Financial and analysed by the Financial Times. But while the likes of China and the US have continued to expand the size of their banking sectors in absolute terms and relative to GDP, virtually every country in Europe has shrunk its banks significantly.
Up to the summer, corporate lending volumes in the eurozone had declined year-on-year every month for more than three years, according to European Central Bank data. Those trends have pulled down the size of the global banking system relative to GDP — now a multiple of 1.78 times, compared with 1.89 times at the end of 2010.
The snag for policymakers is that until other alternatives to banks pick up the slack, economic growth, particularly in Europe, will be caught in a doom loop.