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What’s happening globally in the financial industry - EY - India

Finesse: March-June 2011

What’s happening globally in the financial industry: a review

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The period March–June 2011 was characterized by strong profits reported by the banking sector in several geographies.

European banks seem to be lagging behind their counterparts across the Atlantic, with several of them still being in the process of shedding their assets and workforce to shore up their capital and remain competitive.

This trend was led by US banks, which earned their highest earnings in the first quarter after the financial crisis erupted in the second quarter of 2007. This momentum was not only restricted to the top banks, since several regional banks in the US also reported better than expected quarterly earnings.

Strong earnings have led to a flurry of dividend announcements from the most prominent banks in the US. What is of significant importance is the fact that this also signals a marked shift in the government’s stance, which had thus far been asking banks to cut their dividends to strengthen their financial position.

The mood was similar in China, where most banks are forecasted to report quarterly profit growth running into double digits amid increasing loan portfolios. Moreover, Chinese banks have witnessed exponential growth despite the government’s efforts to tighten its monetary policy to curb inflation in the country.

Australian banks are also expected to post record profits in the wake of falling bad debt charges and out-of-cycle mortgage rate increases. However, their optimism has been somewhat muted, with weak credit demand and rising costs raising doubts about the sustainability of their earnings momentum.

European banks seem to be lagging behind their counterparts across the Atlantic, with several of them still being in the process of shedding their assets and workforce to shore up their capital and remain competitive amid changed realities.

No respite can be expected for banks in EU member states, since these countries are planning to enforce stringent capital and liquidity requirements for banks — which are in some instances even tougher than Basel III guidelines. For example, the Swiss Government is proposing an equity tier 1 capital ratio of at least 10% for UBS and Credit Suisse. This is considerably higher than the 7% minimum set under Basel III standards. Similarly, Britain’s Independent Commission on Banking, set up to recommend ways of making the banking system more competitive and less vulnerable to crises, has proposed a core tier 1 capital ratio of 10% for the country’s big retail banks. These developments have raised expectations of further asset sales to be made by European banks to raise capital in the future.

Moving back to the US, The Federal Reserve has undertaken an initiative to prevent the occurrence of another financial catastrophe. The apex bank has initiated the process of assigning an on-site senior supervisory officer to each of the big banks, aiming to strengthen its lines of communication with chief executives and directors. This is being seen as the Federal Reserve’s response to criticism for not engaging in depth with the senior management of banks.

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