The financial sector post-crisis
The banking sector in countries where the EBRD invests is showing clear signs of recovery, top bankers and policymakers gathered at the EBRD’s 2017 Annual Meeting and Business Forum in Cyprus said last week.
A panel discussion titled “Banking on Full Recovery?” brought together Fokion Karavias, CEO of Eurobank, Wojciech Sobieraj, CEO of Alior Bank, Carlo Vivaldi, Head of CEE Division at UniCredit and Boris Vujčić, Governor of Croatia’s National Bank.
The panellists discussed the resilience and sustainability of the banking sector and the role that it can play in supporting long-term economic growth, while avoiding the volatility and excesses of the past.
All agreed that a stable banking sector has to be well-capitalised, majority private-owned, profitable, liquid and not exposed to significant maturity mismatch risks. In addition it needs adequate governance structures, risk management practices and an effective supervisory regulatory framework.
Things look better still if the level of non-performing loans (NPLs) is sustainable; if there is no over-concentration on individual sectors or borrowers; if there are appropriate macroprudential frameworks, providing regulation evaluating a given financial system’s underlying health, soundness and vulnerabilities; and if end-user borrowers are not exposed to risk from foreign currency fluctuation.
But are we there yet?
EBRD Managing Director for Financial Institutions Nick Tesseyman, who moderated the panel, said: “I’m convinced that banking has never been more challenging than it is today, with pressures and demands from all sides. Nevertheless the banks are now getting fitter and healthier to be able to contribute to and take advantage of the signs of stronger economic growth that we are starting to see throughout most of our region.”
The panel started by debating one of the challenges – the increase in regulation since 2008 and uncertainty about its future direction and timing of implementation.
Boris Vujčić, Governor of Croatia’s National Bank outlined the issues regulators are most focused on: the safety and stability of banking systems, and the importance of the capital adequacy ratio for providing comfort for regulators, investors and depositors alike.
Each of the senior bank executives pointed to the increased burden of regulation and the disincentives and obstacles it can create to supporting the real economy.
Unicredit's Carlo Vivaldi noted the difficulties in planning business when the requirements of regulators are subject to frequent change. The lack of a unified approach across different countries was also cited as a challenge for banks with cross-border activities. The European approach and its complexity were contrasted with the more targeted approach generally seen in the USA.
At the same time all panellists were in agreement on the need for a simplified approach to regulation, including Mr Vujčić, who indicated that he would be supportive of a lighter regulatory burden, with banks having greater room for manoeuvre, provided that capital adequacy is set at an appropriate level.
There was also unanimity on the enormous strides taken since 2008 to enhance the safety of the banking system, with Eurobank’s Fokion Karavias reminding the audience that banks have raised €600 billion of additional capital since the financial crisis.
Mr Tesseyman was keen that the importance of profitability, and the "business of banking" received equal billing alongside the emphasis on safety and capital adequacy.
There was some consensus that a double digit return on equity is probably the "new normal" target for banks, with Mr Vujčić stating that this represents a decent return if balance sheets have been de-risked.
Mr Karavias highlighted the successful efforts to reduce costs in Greek banks since 2009, while Eurobank’s Wojciech Sobieraj suggested the need to look further than branch closures and to consider what the future of banking is going to look like.
Consolidation is likely to be part of the response, an issue Mr Sobieraj was particularly well-positioned to address, having just completed his 28th post-merger integration process in his career!
Another drag on bank performance has been the persisently high level of NPLs across most of the EBRD region. In Greece, for example, according to Mr Karavias, resolving NPLs will be the number one challenge over the coming years.
Mr Vivaldi struck an upbeat note, saying that he sees bad loans fall almost everywhere and that there is a developing an appetite to digest them.
Panellists agreed that efforts need to be aligned among all stakeholders in order to achieve progress, with Mr Vujčić explaining the critical role of the regulator in incentivising banks to address legacy NPL issues.
Indeed, the new NPL monitoring report published by the Vienna Initiative, a private-public sector platform to support banking sectors in Central, Eastern and South Eastern Europe, confirms that the outlook for bank lending in emerging Europe has improved as funding conditions stabilise and stocks of bad loans fall.
While these legacy issues are finally being addressed, new challenges are also emerging. Panellists accepted that the disruptive power of technology and increased sensitivity to cybersecurity are challenging lenders’ business model and current practices.
“Banks need to adjust to the fast-changing world,” said Mr Vivaldi.
At the same time Mr Sobieraj sees technology, as well as the entry of new players and the partnerships which may be developed between banks and other players as existential questions which will continue to drive fierce competition and lead to change and consolidation in the sector. “Those who are slow to change will be taken over," he said.
Concluding the discussion, Nick Tesseyman said there is some confidence that we are banking on recovery, even if banks will continue to operate in a challenging environment for many years to come.
While each of the panellists is facing different challenges in the upcoming years, there seems to be no doubt that recovery will be accompanied by continued change and significant competitive pressures, to which banks will be obliged to respond.
As Mr Sobieraj put it simply: “We have no choice.”