THOMAS WHITE INTERNATIONAL
INDUSTRY SPOTLIGHT | MARCH 2016
Capturing Value Worldwide®
Negative Interest Rates Seen To Encourage
Lending, But Clouds Outlook For Industry
KEY TAKEAWAYS
The negative interest rate
policies initiated by central
banks in Europe and Japan
have further weakened
the earnings outlook for
the banking industry. At the
same time, political and
regulatory pressure on the
industry is likely to restrict
growth opportunities in
areas that are perceived to
be riskier.
The negative interest rate policies initiated by central banks in Europe and Japan have further
weakened the earnings outlook for the banking industry. At the same time, political and regulatory
pressure on the industry is likely to restrict growth opportunities in areas that are perceived to be
riskier. Some investment banks have benefited from the increased mergers and acquisitions activity,
but market volatility has reduced deal flows in recent months. In addition, most governments, the U.S.
in particular, have been trying harder to prevent the larger merger deals. Credit demand remains
subdued in several emerging countries where the central banks are struggling with inflation and
currency depreciation.
Global equity markets have cheered the negative interest rate policies initiated by the European
Central Bank (ECB) and the Bank of Japan. Though the latest measures are unlikely to be as effective
as the earlier efforts in quantitative easing, negative rates are still expected to encourage increased
lending by the banking industry. Easier and cheaper credit should benefit business and consumer
sentiment, and provide a modest boost to aggregate growth. If sustained, increased economic
activity should lift demand for credit and benefit banks in the long term.
ECB has been reducing rates drastically
80%
70%
60%
50%
40%
30%
20%
10%
0%
Jul-12
Nov-13
Data source: European Central Bank
312-663-8300 | www.thomaswhite.com
Sep-14
Mar-16
INDUSTRY SPOTLIGHT | MARCH 2016
However, the banking industry’s short-term earnings outlook has turned less bright after the introduction
of negative interest rates. Unlike earlier, central banks will not pay interest on overnight deposits
maintained by commercial banks. Instead, commercial banks in Europe and Japan now have to pay
interest to the central banks on such deposits. This policy also has the effect of reducing long-term
bond yields, further dampening average borrowing costs across most popular credit products offered
by banks. As a result, the net interest margins of most banks are likely to come under pressure in the
coming quarters.
The global banking industry
is also facing increased loan
loss risks from their exposure
to the energy and materials
sectors. Nevertheless,
demand for consumer
mortgages and other forms
of consumer loans as well
as retail financial services
remain relatively healthier in
most developed countries.
This negative policy change has hit the banks that have been struggling with revenue losses in several
of their profitable businesses. Increased regulatory controls have limited revenue opportunities in
businesses such as proprietary trading. Revenues from fixed income trading and equity markets
businesses have also been declining for most global banks. Some of the European banks continue to
scale down their fixed income trading desks while Japanese investment banks are cutting back their
ambitious expansion plans into global equity markets. Heightened market volatility reduced merger
and acquisition activity during the first quarter of this year. In addition, political opposition to mergers
designed primarily for lowering taxes is likely to curb deal flows in the near term. This will likely limit or
even reduce revenues from investment banking for most global banks.
The global banking industry is also facing increased loan loss risks from their exposure to the energy and
materials sectors. The unutilized credit lines provided to energy producers and mining groups could
be a source of additional risk in the coming quarters, unless energy and commodity prices continue
to move higher. To prevent further decline, it is possible that some of the European governments will
follow the Italian government and build investment funds to protect the weak banks. The ECB has
also announced another program to extend medium-term financing to banks at low interest rates.
However, such efforts will likely need to be on a larger scale and available for more banks.
Nevertheless, demand for consumer mortgages and other forms of consumer loans as well as retail
financial services remain relatively healthier in most developed countries. Improving labor market
conditions and low interest rates have sustained demand growth for consumer credit in recent years,
especially in the U.S. The new central bank policies should make credit more affordable for consumers
and increase their willingness to borrow, especially when wages continue to grow at a modest pace.
In the emerging world, credit demand is likely to improve in countries such as China, India and
Indonesia where the central banks have lowered borrowing costs over the last one year. Domestic
consumer demand in these countries is also relatively healthy and inflation risks remain low. In contrast,
central banks in resource exporting countries such as Brazil still lack the flexibility to lower interest rates.
Inflation remains high, though the recent recovery in their currencies could reduce import costs and
lower inflation risks.
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differ significantly from those anticipated in any forward looking statements due to numerous factors. Thomas White
International, Ltd. undertakes no responsibility to update publicly or revise any forward looking statements.
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THOMAS WHITE INTERNATIONAL
INDUSTRY SPOTLIGHT | MARCH 2016
Capturing Value Worldwide®
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