Global Commercial Banking Outlook - Q1 2014

The global commercial banking sector should continue to expand in 2014, following a 2013 in which several major risks failed to derail credit expansion. While there remain significant headline risks in 2014, ranging from renewed rancour in Washington to a collapse in Chinese growth, we continue to see signs that global growth is picking up, and we expect commercial bank expansion to grow with it. We forecast a stronger global economy in 2014 than in 2013, with our global real GDP growth estimate rising to 3.1% from 2.6%, respectively. Accordingly, confidence by both lenders and borrowers should gradually increase: of the 70 banking sectors that we cover, we forecast loans-to-GDP - as a proxy for leverage in the total economy - to rise in 42 countries between 2013 and 2015.

There are major obstacles along the way, not least the fragility of the eurozone banking sector, an increasingly onerous global capital and regulatory regime, rising US interest rates, and risks to the funding models of key emerging markets. Our regional emerging market analysis this quarter focuses on the sustainability of loan growth in key markets, with a focus on potential growth areas (particularly in the frontier markets of Latin America and Africa), and markets that are vulnerable to a pullback in foreign financing, including Turkey. We also look at the degree to which key emerging market banking sectors have overextended the provision of credit relative to underlying economic growth, and which are only in the early stages of a long-term credit growth cycle.

United States And Eurozone: We believe that the US commercial banking sector will continue to experience relatively robust asset growth over the next several years, and that extending credit to the economy will increasingly be the driving force behind this growth. In addition to stronger bank balance sheets facilitating greater credit growth over the next few quarters, we believe consumers and businesses are also relatively well-positioned, having experienced fairly significant private sector deleveraging in the past five years. Meanwhile, the eurozone banking sector faces a multitude of headwinds. In particular, the impact of balance sheet deleveraging on industry growth will be further compounded by regulatory demands for additional capital, as well as a spate of reforms aimed at safeguarding financial stability and progress towards banking union. The fractured credit transmission channel will continue to undermine broader economic growth, which is reflected in our medium-term forecasts.

Emerging Markets Still Vulnerable To Capital Flight
Excess Credit Growth & Current Account Balances

Global Commercial Banking Outlook - Q1 2014

The global commercial banking sector should continue to expand in 2014, following a 2013 in which several major risks failed to derail credit expansion. While there remain significant headline risks in 2014, ranging from renewed rancour in Washington to a collapse in Chinese growth, we continue to see signs that global growth is picking up, and we expect commercial bank expansion to grow with it. We forecast a stronger global economy in 2014 than in 2013, with our global real GDP growth estimate rising to 3.1% from 2.6%, respectively. Accordingly, confidence by both lenders and borrowers should gradually increase: of the 70 banking sectors that we cover, we forecast loans-to-GDP - as a proxy for leverage in the total economy - to rise in 42 countries between 2013 and 2015.

There are major obstacles along the way, not least the fragility of the eurozone banking sector, an increasingly onerous global capital and regulatory regime, rising US interest rates, and risks to the funding models of key emerging markets. Our regional emerging market analysis this quarter focuses on the sustainability of loan growth in key markets, with a focus on potential growth areas (particularly in the frontier markets of Latin America and Africa), and markets that are vulnerable to a pullback in foreign financing, including Turkey. We also look at the degree to which key emerging market banking sectors have overextended the provision of credit relative to underlying economic growth, and which are only in the early stages of a long-term credit growth cycle.

Emerging Markets Still Vulnerable To Capital Flight
Excess Credit Growth & Current Account Balances

United States And Eurozone: We believe that the US commercial banking sector will continue to experience relatively robust asset growth over the next several years, and that extending credit to the economy will increasingly be the driving force behind this growth. In addition to stronger bank balance sheets facilitating greater credit growth over the next few quarters, we believe consumers and businesses are also relatively well-positioned, having experienced fairly significant private sector deleveraging in the past five years. Meanwhile, the eurozone banking sector faces a multitude of headwinds. In particular, the impact of balance sheet deleveraging on industry growth will be further compounded by regulatory demands for additional capital, as well as a spate of reforms aimed at safeguarding financial stability and progress towards banking union. The fractured credit transmission channel will continue to undermine broader economic growth, which is reflected in our medium-term forecasts.

Eurozone Banks Still In Deleveraging Mode...
Eurozone - Bank Assets, % chg y-o-y

But we take market signals very seriously, and note that eurozone banking stocks have rallied strongly since 2012 and look like they could rise further, suggesting that the sector will continue to heal. Many large eurozone banks are still trading at a significant discount to book value, implying investors believe there could be further asset writedowns ahead. We agree that there is likely to be more pain ahead for some regional players, particularly many small- to medium-sized banks with heavy exposure to periphery states. However, leading indicators continue to reinforce our view that the region's economic recovery is broad-based and sustainable, and with signs that ECB is ready to provide additional liquidity support if required, the sector as a whole is probably past the worst.

...But Market Suggests That The Healing Process Is Underway
MSCI Eurozone Financials Index

Emerging Asia:In this quarter's regional Asian analysis, we take a closer look at commercial loans as a share of GDP across a number of Asian economies, as this is a broad measure calculated across the region with decent historical data. Specifically, by using a simple time-series regression, we observe how far the credit cycle has deviated from its long-term trend. Our findings show that there is not one singular trend that defines the region, with a number of countries (such as China, Indonesia and Singapore) exhibiting overextended credit cycles, while others (Vietnam and India) are in the midst of cyclical downturns.

Flying Too Close To The Sun
China - Credit-To-GDP Ratio Versus Underlying Trend

Latin America: Rising household income levels will ensure robust growth in the higher-margin consumer retail banking segment in Latin America over the coming years. However, given that much of the region faces a more challenging economic outlook, as well as the prospect of rising interest rates, consumer loan growth is set to be more moderate for the time being. We believe that Colombia, Mexico and Peru hold most promise of retail banking growth over the coming years. In the case of Mexico, we note that recent banking sector reform, which is expected to increase competition and reduce borrowing costs for consumers, is set to see domestic credit to the private sector as a share of GDP increase. Moreover, we believe that strong economic growth will generate rising income levels in Colombia and Peru, which have relatively nascent banking sectors and where the share of the population (aged 15 and above) with an account at a financial institution remains low by regional standards.

Financial Inclusion To Follow Rising Incomes
Latin America & Caribbean - Financial Inclusion Metrics For 2011

Emerging Europe: As signs point towards an ongoing recovery in eurozone demand, the outlook for Emerging Europe has improved considerably, and an export driven recovery across Central (CE) and South-Eastern Europe (SEE) is already underway. While 2012-13 was a challenging period for the banking sector, which struggled against a sharp slowdown in domestic demand, financial market volatility, FX weakness and deteriorating asset quality, the outlook for 2014 is much more promising. In CE and SEE markets, domestic demand should continue its recovery throughout the year, leading a recovery in both retail and corporate credit. Meanwhile, Turkish credit growth will remain at risk of rate hikes, which we believe will have to be implemented in order to stem capital outflows, while Russian credit growth will remain robust, but is liable to decelerate slightly next year.

Exchange Rate Stability Is A Concern
Bank External Debt Levels, %

Middle East & North Africa: The outlook for the MENA region's banking sector is mixed. Whilst we expect significant convergence across the region, the Gulf will remain the outperformer with Qatar a particularly standout. The banking sector in the Gulf will be buoyed by heavy government spending throughout the region, particularly on large-scale infrastructure projects. Elsewhere, the picture is less sanguine as the effect of low base effects are outweighed by political instability, particularly in Libya and Iran.

Still Room For Growth
Middle East - Total Banking Sector Assets

Sub-Saharan Africa: Africa's banking sectors are generally poised for strong expansion owing to rapid economic growth which will generate growing demand for banking services among business and consumers. Some banking sectors will see particularly rapid growth in assets owing to booms in various sectors. In this regard, we highlight the following: Mauritius due to real estate and medical tourism; Botswana due to mining, construction, real estate and tourism; Uganda due to oil; Namibia due to trade logistics; Mozambique due to coal and gas; and Nigeria due to infrastructure, trade and residential construction.

Mozambique Outperforming
Southern Africa - Banking Sector Asset Growth, % y-o-y
×

Enter your details to read the full article

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.