A relatively upbeat end to last year in the light of stable market conditions does nothing to reduce the possibility of crisis for many countries if the US dollar and economy do not recover.
The big theme in many banking markets around the world in 2004 was consumer lending and mortgages. And with the substantial growth in these areas, along with the benign credit environment that has existed, it seems possible that the record profits achieved by banks around the world in 2003 ($417.4bn by the Top 1000 banks) will be exceeded in 2004. The big question, however, is whether these relatively stable conditions can continue into 2005 in the light of potentially dramatic market changes that include, among others, a sliding dollar, rising interest rates and the introduction of new accounting standards.
Although banks appear to have ended 2004 relatively unscathed and in buoyant mood, the outlook for 2005 does not appear quite as sanguine and looks vulnerable to increasing volatility. Rating agency Standard & Poor’s takes a modest view and “expects the profitability of European banks to remain satisfactory in 2005, although the end of the long-term decline in interest rates and the related boom in mortgage borrowing will likely constrain earnings growth.” It sees a not dissimilar outlook in other markets, including the US.
While it is reasonable to suggest that the strong performances of many banking sectors are less likely to be sustained in 2005, there is also the prospect of a much bleaker outlook. The decline in the dollar, which can be genuinely argued has only just begun, could have serious repercussions on many economies around the world.
And while optimists may judge the dollar’s slide and the burgeoning US deficits as manageable, many others view a serious economic crisis as imminent – or at least inevitable.
In many areas, such as central Europe and the Middle East, banking sector expansion seems unstoppable, as economic expansion and increasing banking penetration along with record oil revenues in the Gulf drive up bank profits. In the opposite direction, downward ratings pressures persist in Germany and will not be helped by the removal of state guarantees in July.
Elsewhere, factors such as the introduction of international accounting standards, the flattening of consumer lending, concerns over increased personal indebtedness, growing regulatory costs and lower economic growth are all likely to put a brake on bank earnings.
The issue is how much change will occur this year. It is not difficult to argue for the status quo or marginally less – but banks don’t necessarily follow such a smooth course. A more likely outcome, given the clear worries over US policy and the dollar, is that 2005 will be a year of financial crisis for many, with bank profits taking a substantial beating.
