It wasn’t just Deutsche Bank that was grappling with big questions about the future at the International Monetary Fund meetings in Washington last week.
The German bank is scrambling to overhaul its operations as it faces a multi-billion dollar fine for selling toxic mortgage-backed securities in the United States.
But many others in the banking industry are also still figuring out what they should be doing, nearly a decade after the financial crisis, as they grapple with anemic economic growth, wafer-thin returns on lending and the possibility that regulators will further hike their cost of doing business.
“This new world of low interest rates and even negative interest rates is something that is very difficult,” said Frederic Oudea, the chief executive of French bank Societe Generale.
“It is a game changer, not just for banks but for the whole financial industry,” he told an audience from the Institute of International Finance (IIF), a trade group for big banks that holds its annual meeting alongside the IMF.
Deutsche Bank’s immediate obstacle is the U.S. Department of Justice’s demand for a massive fine over the sale of bad mortgage bonds that could far exceed the 5.5 billion euros ($6.2 billion) in provisions that the bank has set aside. Such a bill could require it to raise more capital.
But Deutsche Bank’s fundamental problem is that its large investment banking business doesn’t fit the post-crisis era.
Chief Executive John Cryan is in the middle of an overhaul, cutting jobs and selling assets. But with interest rates showing no signs of lifting, he needs to move fast.
Since the crisis of 2008, banks on both sides of the Atlantic have shored up their defenses against future losses, adding hundreds of billions of dollars in equity capital and shedding loss-making assets.
Sergio Ermotti, the chief executive officer of Swiss bank UBS, said those defenses had proved their worth in recent weeks when other European banks were largely insulated from the lurch in Deutsche Bank’s shares.
But with rates expected to stay lower for longer, more banks will be under pressure to change with the IMF warning last week that lenders in Germany, Italy and Portugal needed to take urgent action to address old, non-performing loans and bloated, inefficient business models.
“Crisis is the wrong word. We are in the middle inning of the reshaping of the financial landscape,” said Mark McCombe, global head of institutional client business at asset manager BlackRock.
The Meaning Of Life
U.S. bankers attending the IIF meeting were far more upbeat than their European counterparts.
JPMorgan Chase CEO Jamie Dimon, Morgan Stanley head James Gorman and Citigroup boss Michael Corbat, did their version of the “Three Amigos,” taking to the stage together to talk up the strength of the U.S. consumer and their own roles in the global economy.
In a separate session, Goldman Sachs Group President Gary Cohn said the U.S. banking system was in the “best shape it has ever, ever been by far.”
Like their European rivals, many U.S. banks are struggling to get shareholder returns above their cost of capital, but they are making more progress because they wrote off larger portions of their bad loans earlier – enabling them to return to growth more quickly – and most of their crisis-era litigation costs are behind them. The U.S. economy is also improving at a faster clip than Europe.
“Is it sustainable for any sector to have a return on equity in the long-term that is below what shareholders expect? I don’t think so. Shareholders have been, so far, relatively patient. We should aim to sort out what can be sorted out,” said Oudea.
Britain’s vote to exit the European Union, known as “Brexit,” is another headwind facing international banks, with the UK financial industry risking a loss of up to 38 billion pounds ($48.34 billion) in revenue if the country has only limited access to the European Union’s single market, according to one study.
“The big winner for Brexit will be New York; you’ll see more business moving to New York,” Gorman said at the IIF meeting.
The competition from technology companies in banks’ traditional markets, such as lending and payments, has also ramped up the pressure to change.
In the pre-crisis days, banks would have merged to cut costs, but regulators are now much less in favor of allowing the creation of big, cross-border lenders which could disrupt markets if they got into trouble.
Instead, banks are left to swing the axe where they can and ideally build big market positions in areas that are not penalized by big capital charges, such as consumer lending and asset management.
“The transformation process is still ongoing and it is painful,” said Alex Manson, global head of transaction banking at Standard Chartered Bank. “But the quicker you can define what it is you stand for, the quicker you can go to execution from meaning of life mode.”