Senior managers in the global banking sector the most pessimistic compared to other industries

Teet Tender

PricewaterhouseCoopers

Advisory Service Line Leader

April 2009

Senior managers in the global banking sector the most pessimistic compared to other industries

The PricewaterhouseCoopers’ (PwC) Global CEO Survey presented at the World Economic Forum in Davos at the end of January showed unprecedented pessimism among the world’s business elite in regard to the foreseeable future of their companies. A separate overview of the banking sector indicates, as expected, that the prospects of the “main culprit of the economic crisis” are even more depressing, although various experts believe that the banking industry does have good prospects of being the first sector to emerge from the crisis and start rising again.

Compared to all the participants in the survey, there are almost 50% less of those among senior banking managers who are convinced in the growth of their sector in a 3-year perspective (20% and 12% respectively) and those who intend to launch new products to the market this year (17% and 9%) and considerably less of those who are planning to expand to new geographic markets (17% and 12%).

The authors of the survey point out an interesting dilemma in regard to the future of the banking industry – the development of relationships with the public sector, primarily in cases where governments have allocated extensive funds to save the banks. Having bought into the banks with public money, politicians and officials expect the banks to conduct reasonably termed loan activities that would enliven the economy, while the banks’ primary business concern is to strengthen their equity capital. Besides the pressure to earn a profit, many banks with state interest are expected to also start feeling pressure to fulfil “social objectives” like, for instance, changing their interest rates or issuing advantageous loans to companies or economic sectors the government has determined as having strategic importance etc, which may impair (but also strengthen) the competition positions of other market participants.

The authors of the survey hold that the future will also see a shift in the geographical emphasis of banking from the West to the East, i.e. from the USA towards developing markets (particularly China), while also bringing along the rebirth of the more simple and transparent classic banking that is less susceptible to risks: the profits of banks will decrease and the responsibility in assessing the customers’ creditworthiness and risks will increase, preventing a drastic drop in risk-adjusted income.

The economic crisis has not yet hit the Estonian banks to such an extent that the government would have needed to consider an intervention. This could, however, leave the economy in a long-term slumber, as the risk tolerance of banks has decreased considerably as a result of recent events. As a consequence, the possibilities for companies of getting loans for developing their business have decreased, hitting in this way the very basis of the entire Estonian economy. I do hope that the Estonian government will find possibilities to stimulate the reactivation of lending activities by other means in order to improve the overall business environment.