Saturday, 16 October, 2021
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Global Performance of Banks during Pandemic

Nironjan Roy

Global Performance of Banks during Pandemic
Nironjan Roy

Usually, disasters come with dual impacts on society as ordinary people are the worst sufferers while some fortunate ones amass wealth. The worldwide Coronavirus pandemic is not an exception, as irrespective of rich and poor, the whole world has suffered loss of lives, while some groups have amassed wealth. The poor and middle class people have been scrambling to survive with government assistance and even by borrowing after exhausting their hard-earned savings. Millions of self-employed people owning small and medium businesses are on the brink of bankruptcy. The government debt has skyrocketed in almost all developed countries in order to support the economy. These are the worst historical effects of the pandemic, which globally hit the economy and the society.

However, there is another side to this disaster as some sectors, especially large-retail stores, online shopping giants and IT based companies like Amazon, Netflix, YouTube, Facebook, Google, etc. have been able to exploit the situation and skyrocket their profit. The banking sector has also done well in this global pandemic.

Impact of banking business in recession: In general, the banking sector remains steady during recession periods, although the aftermath may not always be good. Usually, banking is not directly impacted at the beginning of any economic recession. However, sometimes adverse impacts of prolonged recession happen during the later part. In short recession, banks historically maintain steady growth. Almost in all previous recessions caused by weaknesses in economic fundamentals, businesses first experienced slowdown and downturn which generated less cashflow and thus caused the recession. In such situations, banks used to come forward with special packages to support businesses to survive and turnaround.

The recession of 2008 was, however, an exception as the epicenter of the financial meltdown was caused by the banking and financial industry which collapsed first and then affected other areas of the economy. Because of unique features of the economic recession of 2008, recovery had taken a longer time than usual than previous recessions.

Recovery of pandemic-hit economy: The global economy has remained partially closed or suspended since the outbreak of pandemic from early 2020. Non-essential businesses are almost closed, and most essential businesses are running with limited capacity. Unemployment rate has reached an all time high and inflation rate is also very high which are clear indications of an economic recession. Nevertheless, the authorities are reluctant to declare that the economy is in recession because two parameters are very strong, one is the stock-market while the other is the housing market.

Share price indexes in all leading stock markets particularly in the USA and Canada have been rising almost every day breaking initial records. Similarly, the housing market is skyrocketing in North America. Although there is no apparent reason for such unusual rise of share price index and housing market, speculation is being held responsible as there is market perception that the economy will recover faster resulting in a new boom soon after reopening. Some economists believe that there are no fundamental weaknesses in the economy and as such no indication of economic recession. Because of the pandemic, the economy remains standstill and will start accelerating as soon as normalcy is restored with full reopening. The present economic state is compared with the traffic jam on the highways where vehicles which were moving very fast, got temporarily stuck for some reason and will start moving fast as soon as the jam is cleared. However, there are opposing perceptions in the market as well, as some economists and thinktanks believe that nobody really knows how the economy will behave when normalcy is restored.

The banking business in pandemic-hit economy: Since the stock market and the housing market are very active, banks’ businesses have been persistently rising because the bank's major business comprises these two sectors - investment in the capital market and housing market. Moreover, the cause of banks’ loss resulting from borrower’s default has not risen at all. Borrowers so far have been able to service their debt with government assistance. Besides, the nature of the banking business, particularly its lending activity, is such that once lent, revenue is generated over the period unless the borrower defaults. So, the revenue of banks will grow as long as borrowers can service their debt.

However, banks suffer losses when borrowers start defaulting. This loss may be so enormous that the bank may not be able to withstand it and can thus succumb to it. Therefore, the first six months of recovery is very crucial for banks’ performance. In the present situation, the first six months to one year will be very crucial for the banks’ performance. During this initial recovery or reopening, if borrowers can survive and do not default, banks’ performance will remain promising, otherwise it will be adversely impacted.

Global performance of banks in pandemic-hit economy: The nature and scope of bank’s revenue generated from lending and investment activity remain steady because banks revenue generation during pandemic-hit economy did not plummet. Instead, almost all leading banks in the world generated steady revenue growth last year.

However, the banking sector in the developed world could not maintain the growth compared to the banking sector in Asia and the Pacific region. Recently, UK based magazine ‘The Banker’ has published a performance report of the hundred largest banks of the world. Their report reveals that banking in China alone has occupied 47 per cent of revenue while countries in the Asia Pacific region together have captured 55 per cent of total revenue generated by banks of the world's top ten countries.

Even the banking sectors in the developed world particularly the USA, Canada and France could not perform well as their revenue declined. Even Germany and UK could not retain their position in the list of world’s top ten countries, whereas German based Deutsche Bank was one of the world’s largest banks even a few years back.

Alongside the countrywide banking sector’s performance, the data revealed that out of world’s top 20 banks, nine are from China while only five banks are from the USA which is known as the world’s largest financial market and hub of world financial industry. Only four European banks have retained their positions among the world’s top 20 banks of which two banks are from France, one from the UK and one from Spain. No bank from any other European countries, not even the Scandinavian countries, could get a position in the world’s top 20 banks list. No German bank nor even any bank from Sweden or Switzerland was able to keep their world ranking among top 20, although UBS of Switzerland and Deutsche Bank of Germany are considered as two of the largest financial institutions in the world.

State-owned banks are better performers than private banks: The performance of the world’s banks published by ‘The Banker’ reveals that overall, the Chinese banks have demonstrated solid performance with stable revenue growth, surpassing any other country’s banking performance including the USA. More importantly, Chinese banks have to face undue competition in international trade, as they do not receive fair treatment in adding confirmation to the LCs issued by them or in maintaining counterparty limits with the banks in the developed world. In spite of the adverse situation in international trade, the Chinese bank’s solid performance with steady revenue growth is really a praiseworthy achievement and should be a lesson for other large international banks which always show their biased attitude to the banking system of other parts of the world. Furthermore, Chinese banks are mostly state-owned establishments, so better performance of Chinese banks, particularly in a pandemic-hit economy, demonstrates that state-owned banks can perform much better than privately owned banks if they are properly and efficiently managed.

 

The writer is a banker living

in Toronto, Canada