It’s unpleasant but true: companies are hit by crises from time to time. In between crises, companies then go about their business. In the European banking sector, it’s the other way around. Only from time to time things go on as usual.
Since the early phase of the ongoing banking crisis in 2008, the shares of financial groups have stubbornly clung to their downward course. Intermittent price recoveries made a point of really only being intermittent. A serious change of course is just as lacking as the necessary structural measures. But apart from life-prolonging emergency treatments, there is not much left for many to do anyway.
The following chart shows the total return of European banking sector stocks, including dividends. For comparison, the development of the broad global stock market is shown, converted into euros.
Characterized by constant capital increases and the associated dilution effects in the case of share issues, share prices are falling, as is the proportion of existing shareholders in many a financial institution.
Technological turnaround & illustrative comparisons
Technologically, the industry is also in a turning point. Between PayPal, crowdlending, Square with its CashApp, and developments in cryptoassets, some institutions seem simply overwhelmed. The often long-delayed and then rushed, obsessive attempts to appear modern, be it through made-up websites or through attempts to adopt digital formats, often lag behind the requirements of reality. As a result, they slide involuntarily into the comical.
As with other technological developments, the ongoing structural change is likely to hit the affected industry long, hard and, above all, irreversibly. After the introduction and spread of tractor use in 1920-1940, the number of horses and mules in the U.S. declined rapidly and dramatically, as the following table shows.
The ‘aged animals’ of the financial industry are characterized by processes that still rely on the fax machine or manually maintained Excel files. Both are even more widespread than industry outsiders might suspect. From a risk perspective, this is comparable to a house builder who still installs two-core cables because he would first have to go to the hardware store to buy the three- or five-core cables. For reasons of cost, a residual current circuit breaker is dispensed with altogether. Nothing has happened in recent years, so everything has been done right.
From the point of view of efficiency, the comparison between an axe and a chainsaw comes to mind. Apparently, there will still be institutes with very lenient customers in 2020. Some contemporaries are more interested in a chat over crumbly meeting cookies than in a cost-effective and fast service. However, this is not representative of the majority of customers.
Many older people are also very taken with digital services and do not seem at all as overwhelmed as some greenhorns might have imagined. For example, the number of people whose hearts are set on the remittance slip or the printed account statement in A4 format is steadily decreasing. The advertising message inserted at the bottom of the page in 8-letter font has already been read at best by the person who formulated it.
Future prospects: Beware, not everyone has a parachute ready!
From an economic perspective, the environment for banks in the coming years will be characterized by continuing capital requirements, rising write-downs and falling margins. The increasingly limited political view and a frightening ignorance of the economic consequences of laws passed and regulations promulgated are accelerating the downward slide in this sector as in others.
Coupled with regulation that increasingly leaves the impression of having been written together in an asylum, the observer has to close both eyes to see a pretty picture.
Incidentally, no one should give general absolution to small institutions without good reason. The incompetence and an ego that often far exceeds the capabilities of some of the shining lights – if they are mentioned in the media at all – are revealed primarily among employees of large institutions. It is therefore not appropriate to ascribe greater abilities to the pilots of smaller financial aircraft in general.
It is precisely the clinging to old structures and the resulting lack of sustainability that is leading many an institution straight toward a stall. The number of parachutes will not be sufficient for all employees or all customers at both large and small institutions.
As a customer, always pay attention to what services you need in the first place and what the costs are for them. In order to keep or gain a clear head as a shareholder of a financial institution, it is imperative to take a look at a current annual report and also read between the lines with an alert eye. As soon as you see an excessive reference to the past, in the worst case still paired with blatant self-praise, then a warning light should come on.