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Insight of the Day: Banks, at least, are making money from a turbulent world

Global Banking Resilience in 2023: Despite the potential for catastrophe, the global banking industry emerged triumphant in 2023. The nightmare scenario of a contagion-driven financial crisis fueled by multiple bank failures in the US and Europe was averted. Last year’s mini-crisis of bank failures was primarily due to idiosyncratic management issues at the eventually rescued banks. However, it served as a wake-up call for the industry, especially among the rapidly proliferating neobank challengers1.

  1. Focus on Current Account Savings and Deposit “Stickiness”: To mitigate risks, bank CEOs focused on boosting the current account savings account ratio and improving the “stickiness” of deposits. This emphasis aimed to enhance stability and prevent rapid mass deposit withdrawals that could lead to bank collapse1.

  2. Positive Return on Equity (ROE): After 15 years of negative or flat ROE since the global financial crisis of 2007-2009, last year saw a positive return on equity for banks. This improvement was driven by an optimal net interest margin (NIM) environment due to tight central bank monetary policy1.

  3. Asia-Pacific Bank Profits Soared: Many lenders in the Asia-Pacific region achieved record high net income, even in countries like Japan, where the banking sector had battled negative interest rates for 12 years. However, China was an exception due to challenges in its property sector1.

  4. Cost Efficiency and Asset Quality: The global banking industry demonstrated greater cost efficiency and improved asset quality. However, the direction of travel will depend on factors such as economic growth, central bank base rate moves, credit demand, and loan delinquency rates1.

  5. Challenges and Opportunities: Investment banking fee wallets suffered as deal-making and listings declined. Traditional bank lending faced competition from a thriving private credit market engineered by the nonbank financial sector. Leveraged buyout funds were more likely to come from large hedge funds than big banks. Additionally, environmental, social, and governance (ESG) issues remained a dominant theme1.

In summary, while challenges persist, the banking industry has adapted and found ways to thrive in a turbulent world.

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