It has been a truly dreadful year
for most banking markets around the world, reflected in some truly
dire stock market performances. Out of a basket of 50 banking
groups, only seven have seen their share prices rise across the
year.
And only one – American Express –
is able to show a double-digit increase in its share price.
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If 2008 was considered to be an
annus horribilis for banking performance – in that year, only one
major lender, Wells Fargo, posted an improvement in its share price
– 2011 runs it pretty close.
Five of the biggest names in retail
banking litter the foot of the share price table in 2011: Bank of
America (share price down 62.9%), Royal Bank of Scotland (50.7%),
Raiffeisen (54.6%), UniCredit (54.8%) and Lloyds (down a whopping
63.5%).
For all of them, 2011 was a year to
forget.The collapse of the Bank of America (BofA) share price has
resulted in the US’ largest retail bank only just scraping into the
top 20 banks by market capitalisation.
In sharp contrast, the major retail
banking players in Canada – take a bow Toronto Dominion, Bank of
Montreal and Royal Bank of Canada (RBC) – have managed to chart
their way through 2011 relatively cleanly.
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By GlobalDataRBC in particular posted record
results for its domestic Canada business unit, its group results
only being skewed by the losses arising from its exit from the
American retail banking sector.
Positives in the American market in
2011 were few and far between. For the second consecutive year,
total US branch numbers declined, to 98,202, down 315 from the 2010
count.
Wells Fargo and BofA continued the
previous year’s trend of axing branches, losing a combined total of
387 branches. Deposits did at least rise, by 7% to $8.25trn from
2010 to 2011, outstripping the 2% deposit growth that occurred
between 2009 and 2010.
Chase was especially active,
opening a net 180 new outlets and growing deposits by $116bn.
The majority of the most
interesting merger and acquisition activity in 2011 occurred in the
US, at least until news broke that the UK-based Cooperative Bank
was set to treble in size.
Capital One’s deal to acquire the
US assets of ING Direct and the deal to snap up the US card and
retail units of HSBC catapulted it to the seventh-largest US bank
by assets.
In addition to posting a
sector-beating share performance, American Express also posted
strong growth in deposits and now ranks the 14th-largest US-based
bank by that measure.
Citigroup will be one of the most
interesting US banks to watch in 2012.
Unlike its domestic US rivals such
as Chase and Wells Fargo, it is well placed in a number of the
emerging market economies with ambitious plans for growth.
Around two-thirds of Citi’s
revenues are already earned from outside the US.
It has beefed up its retail banking
management and is carving out a strong track record in driving
digital channel growth. It has also been posting improved earnings,
yet its share price continues to languish.
Initial 2011
optimism
At the start of the year, there were genuine grounds for
optimism across the sector. Major banks in the mature markets had
supposedly recovered from the worse of the financial crisis and
were in much better shape than they were in 2008.
Old fashioned metrics such as
liquidity, capital, loan write-off rates, revenue and profits –
fundamentals by which one would traditionally analyse banks – have
in many markets moved in the right direction – macro-economic
factors almost all of them negative, have held sway.
Bluntly, fears over sovereign debt,
especially in Europe – are making risk-averse investors unwilling
to support bank shares.
The outlook for the fourth quarter
and the New Year is not much cheerier. Chase’s CEO Jamie Dimon has
warned that its results will be hit by flat investment banking
revenue while it may post a loss at its private equity unit.
The jury remains out on whether an
improving US economy (albeit at funereal pace) will be reflected in
an improvement in US bank share prices or whether the travails of
the eurozone economies will benefit or harm US banks.
In Europe, the final outcome of the
capital exercise set by EBA – increasing the capital shortfall to
€115bn ($150bn) across 71 lenders – to achieve a target core tier 1
ratio of 9% by June 2012 hardly serves to boost investor
confidence.
German lenders in general and
Commerzbank in particular, are among the worst affected by the
exercise.
Within Europe, it is possible to be
positive in looking at prospects for 2012: take Poland for
example.
Polish-controlled banks do not
depend on external funding with only four of the largest 10 banks
in the country having loan-to-deposit ratios above 100%.
If they are brave – and arguably
sensible – the international banking groups operating in Poland
will not seek to delever in the profitable and growing Polish
market notwithstanding that they may be struggling in their own
domestic markets due to clients existing high leverage. They are
also suffering from increased capital requirements.
In the keenly watched Turkish
banking sector, there remains concerns about inflationary and
currency pressures.
Weak credit data in Turkey reflects
erosion in consumer demand on higher loan rates, while weak
consumer/business sentiment and the local banking sector’s recent
relatively more conservative lending approach hinders confidence
about one of the most interesting sectors.
Across Europe as a whole, analysts
polled by RBI expect deleveraging risk by European banks
over the next two years could total anything from €2trn to €3trn,
driven by funding difficulties, the need to restore capital or the
need to adjust over-extended business
models.
A note to clients from Morgan
Stanley in mid-December was particularly gloomy, forecasting that
European banks may delever by as much as €4.0trn-€4.5trn in the
next three-to-five years.
If such forecasts are borne out,
earnings will be depressed further with the inevitable result that
European bank share prices will remain under pressure.
In the event that the most gloomy
analyst forecasts are excessively pessimistic, national retail
banking champions such as BNP Paribas, Barclays, Deutsche Bank and
KBC will be placed to recover some of the massive share price
losses posted this year.
Elsewhere, there have been positive
signs from Latin America, with bank share prices increasing towards
the end of the year in Brazil, Peru, Panama, Colombia and
Argentina.
Douglas Blakey
