WASHINGTON Oct 9 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
"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
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
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
"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
"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."
($1 = 0.8928 euros)
(Editing by Bill Rigby)