Banks in the West are barely surviving

Tue, 27 Jul Pre-Open

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Banks across the US and Europe, both big and small, we badly impacted when the global financial crisis unraveled. The bigger banks especially were the ones who had to go with a begging bowl to the governments in order to prevent a collapse. And the governments duly obliged. Thus, the global economy was witness to huge amounts of money being pumped into these financial institutions.

More than a year has passed since then. And the picture that has been emerging is not particularly enthusing. The good news is that the situation has not worsened more than what it had for quite some time now. For instance, loan losses have begun to ease. However, there are much bigger concerns that banks have had to deal with.

Employment and falling interest rates which bolstered banks’ performance in the past would not play out for years to come. Moreover, while the write-offs have slackened, so have the revenues. Lending has been subdued due to lack of demand. Consumer credit has also stagnated as consumers are wary of spending. Corporates are also sitting on cash and are cautious with respect to investing these funds. Therefore, they are not borrowing at a pace similar to the one witnessed in those boom years. Moreover, with banks scrambling for business, pricing is also getting more and more competitive.

In such a scenario, banks are surviving but are hardly reporting stellar performances. Persistently high unemployment in the US has meant that borrowing activities of American consumers have considerably slowed down. This would mean lesser growth in lending for American banks. In Europe, the sovereign debt crisis is still hampering economies in that region. And so demand has trickled down there as well.

It would seem that consolidation and cutting costs is one way of shoring up performance. But many banks have already become too big. And so acquiring more companies could do more harm than good. Infact, at the height of the crisis, there were talks of breaking up banks into smaller ones to make them more manageable and less prone to crises. Little wonder then that for banks too, emerging markets are proving to be the bread and butter of their overall operations. After all, these economies have recovered much faster and the economic conditions are not as bleak as that in the rich world. Take Citigroup for instance. The Economist has stated that Asia and Latin America account for one third of its revenues and two thirds of its profits. Meanwhile, it is amply evident that as long as economies in the US and Europe flounder, banks operating there will have to contend with a slow growth in business.