On Thursday, January 16th, the Economic Intelligence Unit sponsored a webinar on their forecast for the Financial Services Industry in 2014, part of a series of six industry-wide webinars that the EIU is putting on based on their industry reports that came out at the end of 2013. I already did a post on two of those other webinars, on the Retail and Consumer Goods Industry in 2014, and on the Automotive Industry in 2014.
This webinar on the Financial Industry in 2014, was presented by Steven Leslie, the lead analyst for Financial Services in the EIU.
1. MAIN TRENDS IN 2014
First of all, there is a synchronized upturn in the major developed economies. The US recovery is deepening, and is broad-based, despite the disappointing job report for 2013 Q4. Europe is still struggling to recover, but at least is now showing positive growth. Japan’s economy is finally on the move and is looking stronger. Outside of the developed economies, however, there are tighter financial conditions.
In the world overall, however, there are tighter financial conditions. China, India, and Brazil all need economic reforms to stabilize their growth. Some capital will be fleeing developing economies; they had an inflow of capital before because of their highest interest rates, and their good economic performance. Now there are doubts about policy choices, and the interest rate spread between the developing economies and the developed economies is tightening.
All around the world, the eyes are on the Fed, which is cutting down its money printing as it tapers off the so-called quantitative easing program. On the interest rate side, there will be no official rate hikes in US before the third quarter of 2015.
2. THE FED, TAPERING AND THE RISK OF BUBBLES
Ben Bernanke says the Fed will reduce its bond buying as part of the quantitative easing program by about US $10B/month, to US $7.5B/month, with further cutbacks in store. Janet Yellen who takes over the Fed in 2014, has stated that she intends to pursue the same policies as Ben Bernanke, at least for the time being.
The Fed was concerned about instability in asset markets. The question everyone is asking is: is another asset bubble forming? There is certainly some froth in some markets; for example, US equities rose by 30% in 2013. But there is plenty of spare capacity and workers looking for employment in the US.
The inflation rate remains low. Tighter Fed policy would push rates higher, curbing asset prices.
The monetary exit strategy was always going to be complicated in any case. Janet Yellen must balance support for economy with concerns about asset bubbles. Some capital will flow out of emerging markets.
However, the scaling back of quantitative easing in December 2013 did not produce the same run by investors that was seen back in June 2013, as if the market has already factored it in.
3. POSITIVE FACTORS in 2014
The following are the positive factors in 2014 that will be helping the global economy.
- Rising asset prices, particularly for equity and real property
- Steeper yield curves following the rise in Treasury yields
- Resolution of legacy issues of the financial crisis, especially in the US
- Developed countries equity index is higher than the emerging markets equity index
- Sluggish economies like Brazil are still creating increases in property prices.
There will be short-term pain for those holding bonds with lower yields and steeper yield curves. The interest rate spread should be positive, which is good for fixed-asset holders like insurance companies, and pension funds.
In recent months, there has been settlement of lawsuits and resolution of issues regarding mortgage financing and mortgage bond issuance in US. Mortgages are less of an issue in Europe and Asia. There they were investors rather than originators of the mortgage debt.
4. NEGATIVE FACTORS IN 2014
The following are the negative factors in 2014 that will be hindering the global economy.
- Regulatory headwinds: Basel III and G-SIBS, the Volcker rule in US, and the MiFID in EU
- Weak economic growth in some key markets, including developing economies
- Continued losses on portfolios of existing bonds
The Basel III rules are largely in place and are going to be completed by 2019. Regarding G-SIBS, some institutions have been designated but have not yet had to put on a capital buffer yet, which will come in future years. Certain non-bank G-SIBS have been designated by the board in Switzerland.
In US and Switzerland, there are additional national regulations. The Volcker rule in the US tries to manage proprietary trading.
The new basic law MiFID in EU will change how the securities industry works, and will control the impact of derivatives market in line with the last G20 summit of leaders agreement to reduce risk.
EU will sustain growth, but at very low level. Japan not much better but at least sustained from last year.
This weakness will begin to turn around with the growth in developed markets, but will not reach the high point that had been reached before 2008-2009. There are continued losses on portfolios of existing bonds. Fixed-income mutual funds in 2013 had single-digit losses in US.
5. SURVEY RESULTS
Based on a survey of 152 respondents in the financial services industry, the positive sentiment outweighs the negative. 77 respondents felt that the business conditions for their company would be better in 2014 than in 2013; 61 felt that the business conditions would be the same in 2014, and 12 felt that the conditions would be worse than current conditions (2 respondents were not sure).
70% felt that banks in their market would be less likely to fail (vs. 15% who said they would be more likely to fail).
66% felt that investors would favor low-cost investments, as opposed to 11% who disagreed.
59% felt that key financial markets will lose ground to upstarts, as opposed to 24% who disagreed.
41% felt that the global market for IPOs would roar back, as opposed to 31% who disagreed.
6. INTERNATIONAL FINANCE BECOMES TRULY GLOBAL
The global crisis in 2008-09 was an inflection point for emerging market catch-up.
Developing countries went from about 28% of GDP involved with the financial services industry to a forecast 40% this year. The industry remains concentrated in relatively stagnant OECD countries, with the concentration being even starker in insurance and fund management. In insurance market, developed market has 85% of all premiums, with developing countries having 15%.
So not all markets are as global. Current financial firms are still concentrated in more stagnant economies of the north.
7. CUSTOMERS USE MOBILE TECHNOLOGICIES INSTEAD OF BRANCH BANKS
Mobile banking and payments are on the rise, since many more people have phones than banks accounts. Tablets are increasingly popular, as is depositing checks by taking a picture.
Internet access is allowing banks to reconcile accounts from remote locations. Payments systems allow increasingly going cash-free or cash-light payments.
Banks are scaling down branch network in US; this is not true, however, in emerging markets where branches are underbuilt.
The rest of the webinar was devoted to questions & answers.
1. What about US Bank results in 2014?
These are a bit of a bellwether. Mixed bag as you would expect. Economy is sustaining growth, but still weak. Banks have paid out for the most part TARP bailout funds. Some of them did well, some did poorly. Economic expansion is helping certain segments, e.g., in automobile lending, credit card lending, and activities tied to consumer purchases. Banks have started to take hit in mortgage refinancing. In US mortgage rates are tied to 10-year treasury yield.
Wells Fargo had a very good Q4, which is aligned to consumer and mortgage lending.
Banks aligned with commercial lending had a much harder time. Trading desks had a tough year and a tough quarter, due to the change in the interest rates. Commodities and currencies will face difficulties ahead. Realignment of costs and staff in US banks.
2. How QE might effect emerging markets such as those in India and Latin America? Are there any measures that could moderate this effect?
We are heartened to see in May, Ben Bernanke started to indicate that Fed was going to wind down QE in the so-called “tapering”. There was a run in emerging markets with currencies falling and investors pulling out assets. However, this was an overreaction to a normalization in the interest rate cycle. That has been priced in and there was no such recurrence in December 2013. In general we have a bullish outlook on emerging markets. Some countries are in bad position because of fragile current account deficits or trade deficits: Brazil, India, Indonesia, Turkey and South Africa are most at risk.
East Asian countries have built up very large currency reserves so markets like China and SE Asia nations are in a strong position to resist financial crisis.
3. How do you see microfinance in 2014?
There will be a special report on microfinance around the world later on this year at EIU, by the way.
Expectations of the microfinance market depend a lot on the policy framework, which is currently up in the air. It’s pretty stable in Latin America; Peru and Bolivia have markets that are continuing to grow. India suffered a big setback in microfinance sector in the state of Uttar Pradesh a few years ago.
There is an ongoing debate whether microfinance will be regulated at a national level in India. Legislation has not advanced and will not advance until after the election later on this year.
4. Can banks get on solid footing with stress tests?
Cautiously optimistic outlook on banks in EU. Should be helped by economic recovery. They have fewer legacy issues but haven’t dug themselves out yet like the US Banks have. Some of the policy issues are really important. They need to keep a close eye on them.
Policy framework has lost influence, because past stress tests that passed later failed banks. Stress tests will be stricter and closely watched. There is a lot of concern about performance of EU banks.
5. Bubbles bursting in property markets
No signs of that in recent years. If anything, developed country banks pulled back from property in emerging markets. There is not much exposure beyond their own economies. Recent regulation has cracked down on any of those exposures. Little chance of collapse in Latin America having any spillover effect in global economy.
Regulations are pretty tough, and there are a number of chances to measure their impact on bank profitability and GDP. International level Basel III rules, EU rules, and national rules add up to a heavy burden. That said, they will probably have a long-term net positive effect on sustained economic output because of the damage that previous financial crises had, although there will be a short-term deleterious effect on economic output.
Regulatory changes in developing countries: focus has been previously on changes in US and Europe, such as Dodd-Frank or MiFID. Liberalization in China is occurring with the opening of capital accounts. More local changes in insurance regulations in Latin America as they go to more risk-based systems of regulating insurers.
6. Will the trend towards a price cap on consumer credit stifle demand?
I’m not an expert. Expectation would be that it would stifle demand. Most jurisdictions have restrictions on so-called “usury”. Payday lenders have restrictions in the US, for example.
7. Emerging markets—are they truly important for business?
Finance as opposed to other businesses are seen as a network business; it is less open than the consumer goods business, for example. Access to markets is more difficult. On the other hand, despite WTO and other agreements, a lot of growth in emerging markets is not open to global competition. Securities markets is the most open. In other areas, they are not open because of the market structure but because of rules which are difficult to change.
Regarding some initiatives to opening, Central Bank in India is considering allowing global banks to have branches in India if they set up subsidiaries in India. In other places such as Indonesia, there are troubling signs of a clampdown on operations of banks in terms of domestic ownership. DBS in Singapore is giving up its effort to take over a large bank in Indonesia, for example.
Financial activates are much more restricted because of the network nature of the business. This was highlighted by the financial crisis in 2008-2009.
8. Are banks of developing countries seeing opportunities in China’ liberation of renminbi trading?
They are taking up opportunities and that market is booming. Part of gradual liberalization or capital controls in China. No “big bang” like in Russia, but very gradual.
It’s worth pointing out the quite extensive expansion of Chinese banks overseas. Hong Kong bank just received approval of opening branches in US. ICDC, the largest bank by capitalizationk, is opening up in Argentina and other places.
It’s part of the growing trends towards global expansion of emerging market banks.
I thank the EIU for putting on such an informative webinar and I hope to look back in December 2014 to see how closely their forecast came to the actual performance in the coming year!
Filed under: Uncategorized |
4squareviews 
Leave a comment