Friday, October 26, 2012

In the Wake of the Financial Crisis Pt. 3



Last week, we began looking at this report from McKinsey & Co., explaining some of the continuing symptoms of the 2009 financial crisis. McKinsey found that banks across the globe will continue to suffer from those effects for at least another few years. Here are a few more examples the report uncovered.

Regulatory changes have put an end to the proprietary trading models that many banks relied on. As a result, “[the report] prescribes ‘massive cost cutting’ to supplement what has already occurred at the capital markets giants.” Smaller retail and business banks are feeling the crunch as well.

Retail banks, however, face decreasing customer loyalty and business banks "no longer enjoy structurally lower funding costs than many of their large corporate clients," the study says.

Compounding banks' problems are technologies that make it much easier for new competitors to steal customers. Wal-Mart Stores Inc (WMT.N) and American Express Co (AXP.N) on Monday announced a joint venture to provide financial services through a prepaid debit card aimed primarily at low-income customers.

The report also noted an 8% increase in expenses, compared to only 1% increase in revenue for those banks.

Reuters also reported on a lack of investor trust.

More than two-thirds of publicly traded banks in developed markets now trade "significantly" below book value, according to McKinsey, and the average price of insurance against bond defaults for 124 banks sampled by McKinsey rose to the highest level on record last year.

Bank stock prices globally last year traded at 11 times earnings, down from 15 in 2007.

However, there may be a silver lining after all. In addition to the bad news, Reuters also mentioned a major flaw in the McKinsey report’s findings.

Some analysts challenged the dire report. Focusing on conventional double-digit returns to shareholders when interest rates and funding costs are at historic lows is irrational, said Richard Bove, an analyst at Rochdale Securities.

"Anyone who says that banks should be making traditional returns on equity today when the ten-year Treasury is around 1.6 percent has got to explain themselves," he said…

… The good news is that banks that adapt can prosper by financing infrastructure projects that are expected to grow 60 percent by 2020, the report says, and by selling advice and retirement products to aging populations in developed nations and core banking services to new customers in emerging markets.

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