Over the past 12 months, the US banking industry has been in the doldrums. The turn of the year quashed hopes of a return to some semblance of order, as markets continued to plummet: only eight out of 90 US banks in Standard and Poor’s financial index were in positive territory as of February.
Nevertheless, this is only part of the story. Most analysts are coming to the conclusion that the unprecedented quantitative-easing episodes since the Great Recession have weakened the trust in the Federal Reserve’s ability to rejuvenate the world economy (at least in its ability to do so repeatedly). More specifically, the banking market is disappointed that the Fed’s interest rate “lift off” that was supposed to begin to take place last December hasn’t really materialized.
Yet perhaps the most worrisome problems lie with the banks’ fundamentals with deteriorating credit quality. Dwindling oil prices have taken their toll on bank balance sheets, though not through the channels one might envision. Only 3 percent of gross loans of large US banks are “energy exposure loans”. Nevertheless, more troubling are the indirect spillover effects. At the moment the fear that grips the US banking industry is that the fall in oil prices will seep into commercial real estate or render consumers no longer able to afford loan payments on their fuel-efficient automobiles. These fears combined with raising credit costs and largely stagnant revenue streams are likely to keep profits low. As Janet Yellen wavers on interest rate policy, the US banking industry is kept at bay, with investors “playing it safe” more than ever.
Going forward, major challenges remain as Yellen and her team chalk out a strategy to keep the US banks abreast, while at the same time keeping their eyes peeled for what is happening in China and beyond, since an aggressive hike at this moment might only be a pyrrhic victory for the banks.
The outlook for Canadian banks seems quite different from those across the rest of the Americas. 2015 was a year of great change as far as the banking industry in Canada was concerned. Canadian banks saw changes at the helm; CIBC, RBC, Scotiabank and TD Bank all witnessed changes in their CEOs. These transitions were in sync with overarching supervisory changes in the industry, with the swearing in of a new finance minister and new leadership of the Office of the Superintendent of Financial Institutions (OSFI).
ROE (return on equity) has continued to register solid growth, although a slowdown in late 2015 was observed. This is in stark contrast to that of US banks. The new management has been largely successful in maintaining an edge over their peers through policies of greater diversification with a move away from the energy sector to new renewable technologies, inducing not only a competitive edge over global competitors but also gains in productivity.
Although the International Monetary Fund organized a meeting to celebrate the economic success of Latin America in 2015, many Latin American banks remain at the precipice of a looming banking crisis. Historically, the underdeveloped banking industry in Latin America with a flailing finance sector has left the entire continent beset with all kinds of economic woes. But, over the last decade or so, a spate of privatizations and foreign-ownership deals have made Latin American banks and economies largely resilient. The banking crisis, which has been all too common in the region, seems to be occurring with less frequency and intensity, although the stark exception of Venezuela stands out.
Ever since the crisis and especially over the past year or so, banks in Latin America as a whole have seemed to be in better shape than in the preceding decades. For instance, interest on personal loans in Brazil stand at levels not seen since February 2005. In January alone, average interest rates rose 0.11 percentage points, reaching 7.67 percent in February. This has been accompanied with steady growth in the profitability of Brazilian banks.
This is not to say that all is well with Latin American banks. In fact, the Venezuelan banking industry is in complete disarray. President Nicolás Maduro’s announcement of a 60-day “economic emergency” has hit the banks hard. The measures include currency restrictions and stifling restrictions on banks’ foreign-exchange transactions. Annual inflation has already reached triple figures, according to estimates by Venezuela’s central bank. With oil exports accounting for more than 90 percent of Venezuela’s revenues, the bearish oil market has plunged the economy into a recession, and a banking crisis is looming.
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