The stock markets say it all: banking is exposed to the perfect storm. An unfettered spreading of the new coronavirus has untold economic consequences.
With the plunge in the price of crude oil, and further interest rates cuts on the horizon, signs are that the world economy will go in decline before starting to recover. The hopes for an immediate recovery are likely to be dashed.
Nine Focal Points
The consequences for banking are likely to be far-reaching. The industry is facing stark choices and the virus is aggravating the situation further.
These are banking’s focal points:
1. The Narrowing of the Interest Business
The Federal Reserve has taken the lead and European counterparts may follow suit as early as this week: with the economic crisis, interest rates are in for cuts. The Swiss National Bank faces pressure to follow suit, especially if it wants to keep the franc from rising further. Banks will expect to pay more in negative interest to the central bank, at a time, when they will be hard-pressed not to force clients to foot that bill as economic concern is rising and investors balk at trading on the markets. Retail banking will continue to struggle with a narrow interest margin.
2. The Big Client Getaway
When markets plunge, investors are unsettled. The problem for banks: once a client has exited the markets, he isn’t likely to return quickly, if at all. Hence, commission income is down.
A further problem for wealth management is lending, which was a steady source of income in the industry. A crash may yet lead to a margin call and that in turn forces them to either stomp up cash or sell assets. The big question is whether banks were cautious in their lending or whether they now face major defaults.
3. Weak Stock Markets, Weaker Banks
The drop in the share prices of the two big Swiss banks UBS and Credit Suisse implies an operative and strategic weakness, and, what’s more, a loss of faith. The outfall is open. But the two banks, who are exposed to global competition, are on the defensive, especially in comparison with powerful U.S. rivals. Who knows, but the new virus may yet prompt a European consolidation.
4. How to Keep It Going?
Banks, asset managers, and other financial-services firms are fighting hard to keep the business continuity going They have started partitioning the teams that are vital for operations. What this means for a hugely complex firm is difficult to imagine. Systems, administration, internal communication, management functions are exposed to a stress test – but operative chaos is the last thing that banks need.
5. Client Meeting During the Quarantine
Meeting the client more often is the goal of domestic and global banks. UBS even said recently that it wants to get relationship managers to meet clients more often. The coronavirus is in the way of this bid by the bank, with health authorities demanding less social contact. Digital solutions may take the place of meeting in person, but whether the digital services can match the demands of clients. The solutions also need to show how well they face up to the demands of everyday business.
6. Lack of Resources Left for Digital Transformation
Technical solutions including video telephony, the Blockchain, and digital relationship managers are welcome tools at a time of droplet infections. But the necessary investments and the capital needed to develop such services are scarce. A decline in revenue will aggravate the problem. Banks will witness a lack in budget to pursue the digital transformation.
7. Oil Crisis
Russia, Mexico, and the Middle East are important markets for wealth management. A major share of the assets available in those regions is closely linked to the oil price, which hasn’t drop as much in almost thirty years.
While the currencies in countries that produce oil fall versus the franc, the fees of banks exposed to those markets are likely to sag.
8. Property Earthquake
The real estate business is likely to be affected by a recession. UBS economists on Monday reported that the central bank hardly has enough room for maneuver to counter major property market upheaval. Lower rates tend to support homeowners, while businesses face an increase in empty office space. This will reveal how careful the banks calculated their risks when deciding on mortgages.
9. Private Banks: When the Going Gets Tough
The long bull market provided private banks with the tailwind needed to prepare for tougher times. Not all will have used the good times to the best effect.
Those private banks that failed to save for dire years or laid claim to a specific part of the business, won’t likely survive a new major crisis. A country with a saturated banking industry may yet emerge stronger from a period of consolidation.