FYI | Jun 07 2006
By Rudi Filapek-Vandyck
There are many reasons why investors should be worried about near term future prospects for the banking sector. Increased competition and an increased appetite for higher risk loans, for example. And the debate as to whether an increased reliance on third party sales channels to market and sell their home loans will eventually hit the bottom line of the major banks is still raging.
But there are still reasons to remain positive on the sector as well. Credit ratings agency Standard & Poor’s provided one on a global scale describing the outlook for banks as so favourable that these days "are the good old days" for the global sector. Standard & Poor’s published a review of banking industry country risk yesterday.
With the courtesy of the trade magazine for the banking sector, The Sheet, we reprint verbatim, the three opening paragraphs of the S&P review:
The global financial system is in rude health in 2006. From global banking groups like Citigroup and HSBC to small banks in the US or Ukraine, risk charges for loan losses are low, profits are high, and business flows robust. The booming household sector, defying expectations of a slowdown, continues to generate heady profits. Good corporate earnings, relative monetary stability, and healthy growth in the global economy – particularly in Asia and emerging markets – have boosted global bank performance over the past few years.
The deepening use of advanced risk management techniques – notably statistical portfolio management, securitisation, hedging with credit derivatives, and sale of problem loans – has led to a greater dispersal of credit risk. Widespread global implementation of the Basel II capital accord, while complex and cumbersome, should reinforce the trend of improvement in risk management, particularly in the tier of institutions below the top global banking groups. Consolidation and globalisation have spread best practices and created more diversified banking groups less vulnerable to a downturn in a single country or economic sector.
The result is that for most countries banking industry country risk has improved since the beginning of the decade. The potential for nationwide banking crises and individual bank failures over the medium term appears lower in 2006 than at any point in the past decade. The past few years through to the present is looking more and more like a golden age in global banking. This view holds despite Standard & Poor’s projection that the credit cycle will turn in North America and Europe and that the rate of corporate defaults will increase during the next two years.