A minute for your Feedback please

Sunday, May 29, 2011

'Basics of Banking'-or merely 'lazy banking'

Open the annual report of most banks, and turn to the CEO's message. In most cases, you will notice that they profess a return to the 'basics of banking' by focusing on costs, risks, capital, liquidity and what not! The quest for growth has been replaced by a quest for profitable growth. And why not? The pre-2008 ROEs of 15%+ are now projected to be well under 15%, thanks to the stringent capital norms under Basel III. If shareholders need to maintain their expected return, it needs to come by squeezing someone. And that someone is likelier to be external stakeholders(customers, counter-parties, taxmen) than internal stakeholders(employees, directors).Banks are now squeezing customers on terms(more watertight/one sided agreements, higher ROE transactions, collateral, ISDAs etc) and wanting to make profits with little risk.

When banks had cheap funding at near zero prices(cheap deposits, wholesale funding etc) in the post bailout scenario, they did not increase their lending proportionately, but instead used that capital to back their trading activities. That is why the FICC(Fixed Income, Commodities and Currency) derivatives units of banks posted record profits in 2009, before the global risks/capital norms pushed it down in 2010. This did not go down well with politicians, who felt that banks had not fulfilled their part of the bargain by 'priming the pump' and funding businesses. And that is where the phrase 'lazy banking' was applied to banks, who preferred making trading profits to conventional banking income(lending, fees) etc.

Of course, banks stayed oblivious to this, with some CEOs saying that they wished they had not taken the  bailout funds, or that they were 'doing God's work'. The heightened focus on all fronts-regulatory(forced mergers, Basel III), tax(HSBC, UBS severely penalized for helping tax evaders), corporate governance(independent directors, compensation oversight) and economic(pushing more transactions to be done on exchanges-despite the fact that it would lower profit margins)-served as a harsh wake up call.

And that is why banks are keeping their heads down and singing from the same hymn book of 'back to basics'. Of course,  few follow it in spirit. Others use this as an excuse to exit subprime markets(consumer banking, Latam, mortgages) or increase the pricing on existing advances. There still seems no effort towards a paradigm shift in the industry. Already, the 'green shoots' have encouraged banks to restore the pre-crisis pays(albeit deferring the bonuses), and pay mere lip service to moderation. So for those who believe the industry has significantly changed, that may be true sectorally(more in Asia/Infra etc) but not on an aggregate level.

No comments: