Five banking sector predictions for 2009

Welcome to 2009.

For
the past couple of weeks, I’ve been posting reasonably frivolous bits
and bobs, but now to the serious question: what’s in store this year?

For most, 2009 is fairly obviously a year of rationalisation and implementation.

Rationalising the issues that led to Lehmans collapse and implementing ways to create liquidity.

Rationalising the reasons for the failure of regulators and implementing new regulations.

Rationalising
the methods by which governments can manage the economy, and
implementing government-backed policies to unfreeze the wholesale
lending markets.

Rationalising the technologies that connect the markets and implementing systems that make markets more transparent.

Rationalising
the irrational exuberance of the leveraged model of financing and
implementing restrictions on leverage in the future.

So this year will mean rationalising what happened and implementing solutions.

Throughout
the course of the year, as banks consider their options, no bank will
feel like taking any risks. Hence, it will also be a year for
introspection and circumspection rather than innovation and action.

Meantime,
there are a few things that are predictable this year. Some are general
market movements, some are very IT-specific, and others relate to
geographic focus such as the 1st November deadlines for SEPA and the
PSD.

Therefore, I thought I would make a few predictions for 2009.

Today, let’s go for some general observations on the banking sector, which are the easiest and most obvious ones to predict.

1) More major European and American banks disappear

We’ve
seen plenty of this in 2008 already with JPMorgan gaining Bear Stearns
and Washington Mutual, Wells Fargo soaking up Wachovia, and Lloyds TSB
taking over HBOS.

Expect more.

Already the major banks
are closing parts of their businesses in order to try to save costs.
Citi is selling off large parts of the group and withdrawing from many
overseas markets, and Royal Bank of Scotland is doing the same as they
get rid of their insurance divisions.

Expect a lot more of that.

Meanwhile,
even with all of that frenetic activity of rationalisation of
businesses, expect a few more major bank failures in the US and Europe.

Most likely contenders?

Who am I to say?

All I
will say is that some banks share prices are so low today that the
Governments of those banks in those nations will either nationalise
them or force them to merge with a stronger player, as the UK
Government did with Lloyds TSB and HBOS.

2) There will be some spectacular failures in the BRIC economies

The BRIC economies are interconnected with this debacle, and are also extremely vulnerable to it.

China
has seen its growth thanks to European and American consumption of
their goods. Those consumers have now disappeared, and China will see
some spectacular industry failures this year, along with the banks that
back those industry players.

Equally, Brazil and Russia’s
growth was fuelled by the need for raw materials for those Chinese
manufacturers. As those manufacturers fail, so will some of these
suppliers.

Therefore, I don’t expect the BRIC economies to come
riding to the rescue of the West, but expect to see those markets
suffer some of the turbulence Europe and America suffered in 2008.

3) A Global Financial Regulatory Body is formed

The G20 have started this process already and meet again in April in London.

By
that time Barack Obama will be in attendance, and he will want to see
urgent action to ensure that this situation never happens again, as do
Gordon Brown, Angela Merkel, Nikolas Sarkozy, Hu Jintao and the other
nation’s leaders.

Therefore, they will all be as one in
agreeing that the Financial Stability Forum needs to go much further,
and become the Financial Regulatory Forum, comprised of the leaders of
the Fed, FSA, Bafin, AMF and other nation’s regulators.

This global regulatory body will review and refresh Basel II, as well as many other requirements for solvency and reporting.

It
may even mean that some key underpinnings of regulatory change already
under way – such as Europe’s Capital Requirements Directive (CRD) and
Markets in Financial Instruments Directive (MiFID) – are changed,
refreshed and reformed by new rulings focused upon Global Regulatory
harmony.

All that starts up again, just as you thought you had finished your regulatory change programmes.

4) The US will drop IFRS Accounting Rules

Mark-to-market
accounting will be reworked, and the IFRS will lose the impetus it had
in the USA. All of this just after we had gotten to the stage of
understanding what the hell these things meant.

The American
movement away from GAAP to IFRS will falter as a result of
mark-to-market rules, which are even more stringent in IFRS structures.
This will see US firms being allowed to either re-interpret IFRS
rulings or stick to GAAP.

Either
way, it will be significant climb-down from the Bush administrations’
championing of the IFRS accounting approach, which was meant to become
the standard for US firms. Barack Obama’s administration will not care
a jot for that history though, and will want to make the accounting
requirements for banks as simple and supportive as possible.

Therefore,
the US Government will drop any promotion of IFRS accounting in the
near-term, and will reinterpret GAAP to allow a ‘breathing space’.

5) Solvent banks gain major market share.

Related to point (1) is that the biggest difference between 2009 and 2008 will be signs of the real winners starting to shine through.  Some are already showing signs such as JPMorgan,
Wells Fargo, Santander, HSBC and Standard Chartered.

Expect to see a few more.

These
banks are winning on two fronts:

(a) they can acquire and cherry-pick
the best of the weak competition, and buy them for a song – as Wells
Fargo did in grabbing Wachovia off Citi; and

(b) they can acquire and
cherry-pick the best of the prime customer markets, as demonstrated by
HSBC’s recent campaign to say: “we’ve got money to lend”.

By the end of this year therefore, expect to see a new World Order in the banking markets.

By
way of example, Stifel Nicolaus announced their American bank stock
tips for 2009 last Friday ,
which included BancorpSouth, City Holding, Danvers Bancorp, First
Horizon, People's United Financial and TCF Financial. In their report
on the sector, the firm states:

“Though not unscathed by the
credit cycle, these institutions maintain adequate capital levels, in
our view, and, in many cases, will capitalize on weakened competitors …
The list represents our best ideas in a sector that we believe will
remain troubled from an earnings perspective for the next several
quarters.”

Not much confidence in the industry there then.

However, other observers, such as Grant Thornton,
say: “Banks, as a sector, may be thoroughly depressed, but we know by
the Government's own actions that they will not be allowed to fail.
That makes it almost a one-way bet.”

With this one-way bet, focus upon the winners and the ones with capital.

Anyways, once again, happy new year and there are my five market sector predictions for 2009:

1) More major European and American banks disappear
2) There will be some spectacular failures in the BRIC economies
3) A Global Financial Regulatory Body is formed
4) The US will drop IFRS
5) Solvent banks gain major market share.

My
only other prediction would be that I expect the major market indices
to rise by over 20% by end of year. After all, most of them were halved
last year. It will only get better.

Now I know there’s nothing too radical or unusual in that lot, but worth posting just to see what does happen.

Tomorrow, I’ll have a go at a few predictions from a technology perspective.

Copyright: Bruce Beattie, 2009, Creators Syndicate