Banking in 2016 – Where are the risks?

There aren't many bank stock bulls among global investors. Understandable given global growth is still limp, geopolitical risk high, regulation uncertain and disruption on everyone's mind.

What is interesting however is there's no consensus around what to be most anxious about.

"There's no consensus around what to be most anxious about."
Andrew Cornell, Managing Editor

PwC has just released its latest global mood analysis of the banking industry undertaken in conjunction with CSFI, Banking Banana Skins 2015 - Top risks for the banking industry.

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On this front at least there's plenty of diversity.

Of 21 nations surveyed, with respondents including bankers, regulators and industry experts, both Australia and New Zealand were considerably less anxious than peers and – not unrelated – considered themselves better prepared for what the year ahead proffers.

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Photo Credit: PwC Banking Banana Skins 2015 - Top risks for the banking industry.

“Preparedness” globally was rated 3.13 out of 5 (5 being highly prepared) compared with 3.04 last year. New Zealand ranked 1 at 3.54, Australia 3 at 3.50. China and Russia ranked themselves least prepared but the US and Singapore weren't far behind.

On the “Anxiety” scale, with 5 being most anxious, New Zealand was least at 2.79 compared with 3.01 a year ago and Australia 11 at 3.11, just over the global average of 3.10.

Of course such surveys are hardly precise but they highlight how different markets perceive threats and opportunities and how disparate the environment for banks is around the world at the moment.

In New Zealand, the top risk is considered to be technology followed by social media and then the macro-economic environment. Globally, it's macro-economic risk followed by criminality and regulation.

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Every bank has a favourite anxiety: Francisco González, the chairman and chief executive of Europe's sixth-largest bank by market value BBVA worries about internet companies. Over the weekend he called for regulation to ensure a “level playing field” in businesses like payments where the likes of Apple and PayPal are encroaching on traditional bank domains.

Others agree. Federico Ghizzoni, chief executive of UniCredit, Italy's largest bank, argues regulation is tilting the field in favour of non-banks.

“Banks must have the scale to invest significantly in new technology, yet they must also avoid the too big to fail trap, which would put them at odds with regulators and investors alike,” he said.

According to PwC's survey “one of the strongest risks is concern about the quality of banks' risk management, which rose from No. 11 in 2014 to No. 6 in this survey.

“Although much work has been done by banks and their regulators to strengthen risk controls, there is a sense that banks have still not adequately addressed not just the scale of risk but also its changing nature.”

Globally, that changing nature was primarily criminality (up from No. 9 to No. 2) and especially cyber-crime, mainly data theft.

That's the flip-side of where many bankers actually see the traditional industry's key advantage: huge amounts of data and customer knowledge.

PwC noted “this is closely associated with technology risk (No. 4) where underinvestment and obsolescence, and banks' growing exposure to competition from “fintech” companies, now present major challenges”.

For another slant on the outlook for 2016, consider that of ratings agency Standard & Poor's that describes global credit conditions with admirable precision as “divided”.

“We see China's economic slowdown and debt load as a continuing top global risk. Credit market volatility from when the Fed does hike rates, likely in the coming weeks, also remains a top global risk in that it could reduce corporate sector liquidity while amplifying any market stresses or setbacks.”

In interviews with BlueNotes and Banking Day last week, outgoing ANZ chief executive Mike Smith argued the northern hemisphere still didn't properly comprehend the Asian Century and continued to view the operating environment through a Western perspective.

That view is captured in S&P's summary of risk in the region: “While net interest margins are generally under pressure, the major banks in Asia-Pacific have managed to keep their credit costs under control and have strengthened their capitalisation.

“Consequently, banks in the region do have the capacity to cater to credit growth, albeit they may become more selective. The likelihood of banks tightening loan supply remains tied to the risks of GDP growth and economic and credit weakening beyond their expectations relative to balance-sheet capacity, pricing, and willingness for risk. At this stage, we do not see banks tightening loan supply.”

It's the glass-half-empty view typically expressed outside Asia.

Looking around the region, the diversity of views on risk is either incredibly alarming or a little reassuring in that risk assessment is returning to the more normal pre-occupation with parochial issues.

In Japan, regulators are worrying about too much (non-Japanese) regulation. In Asia, bank investors want to know how banks can continue to deliver returns on equity above 12 per cent.

In Australia, there's a pre-occupation around what more capital will do to competition and pricing.

In China, and consequently on client economies in Asia, credit risk is the major concern.

So 2016 is hardly going to be easy but – at the moment – the perception is it will be slightly less risky than 2015.

On that cheery note, this column will take break over the new year period and return early in January.

Thank you to all BlueNotes readers, our contributors, our indefatigable tech team, my BlueNotes colleagues and all those who have helped us through our second year. We really appreciate the support, the engagement, the comments – good and bad – and look forward to taking direction from you our readers on what we should cover in 2016.

A special thanks to our producer, Jenny Farmer, our chief sub, Shane White, our publisher, Paul Edwards, our Junior Vice President (Publishing) Steve Ries and our technologist on the hamster wheel, Reuben Trusler.

Wishing everyone a Happy New Year, Andrew

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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