Banking Banana Skins - Anxiety at Record Levels
30 January 2012
Australian banks are more anxious than overseas counterparts about what the future holds in store. And globally, anxiety levels are at their highest levels since they were initially collected in the Banking Banana Skins Survey 13 years ago, according to the Centre for the Study of Financial Information and PwC.
PwC Banking and Capital Markets Leader Stuart Scoular said Australia's banks are well positioned to capitalise on any weakness in the global environment despite remaining vulnerable to uncertainty.
According to the survey, which polled more than 700 bankers, regulators and industry observers globally, the top risk in 2012 is the state of the world economy (macro-economic risk) caused by the threat of sovereign default by several European nations, followed by concerns over credit risks and liquidity.
Mr Scoular said the 18 Australian survey respondents largely shared the concerns of overseas counterparts but an increasing divergence from earlier surveys was also displayed. For example:
- Political interference rated second in Australia and fifth globally.
- Emerging market concerns rated ninth compared with 22nd globally.
- A high dependence on technology rated at number six in Australia compared with 18th globally.
Our Vulnerability
The pall of Europe's sovereign debt crisis looms heavily over the survey's respondents.
"Although Australia can boast to be one of the world's strongest banking systems, this study demonstrates the acute sense of vulnerability around how overseas events which are largely outside of our control may impact us" Mr Scoular said.
"The European debt crisis is the most obvious, but there is also lingering unease over emerging markets - China's growth in particular - and whether they can continue to act as a counterbalance to the weakness weighing on much of the developed world."
Mr Scoular said although China remained a global growth engine, strains were building internally, including the threat of asset price bubbles and an undercapitalised banking system.
"Add to that the presence of a poorly understood shadow banking system and the risk is that if China does suffer a hard landing at some point then the effects could be far reaching."
The Regulatory Risk
"Regulation is near the forefront of respondents' minds in Australia because much of it has been driven from overseas to cure problems that were, and essentially remain, overseas problems," Mr Scoular said.
Mr Scoular said Australia's strong regulatory environment is one key reason why its banks emerged from the Global Financial Crisis in such a strong position.
"Local respondents are asking the question why they are being subject to new rules that were designed to curb behaviours that were never a problem for the Australian system. There is a sense among Australian banks that they are being unjustly penalised."
Mr Scoular said that the extra burden created by new regulations was loading new costs and requiring business models to be revisited at the very time the banks are attempting to trim costs to cope with the headwinds battering revenue growth momentum.
"As far as the local industry is concerned there is never a good time for new regulations but much of this does appear to be happening at a particularly bad time.
"Increased regulation is likely to lead banks to change their business models and the products offered. For example, deposits with greater than 30-day withdrawal notification periods should become more common as will higher charges for undrawn facilities.
"The task ahead for the Australian banks is how to navigate the regulatory maze. For the most part the industry is well placed to address regulatory reform."
How Australia differs
Mr Scoular said despite mirroring the top concerns from overseas, in some areas the Australian respondents have a divergence of view from their overseas counterparts.
"We are less pre-occupied with capital availability and corporate governance while technology dependence has continued to creep higher since 2008 when it was rated the 11th major concern. It is now number six compared with 18th globally. This relates to the fact that many Australian banks continue with significant system infrastructure projects with any delivery related issues potentially having a significant impact, not only on customers, but also the bank's reputation.
"Interestingly, the Australian respondents see emerging markets as a more significant risk than their global counterparts - rating emerging markets as the ninth most significant risk compared to 22nd globally. This will largely be due to our proximity to Asia and our relative exposure to those markets - either directly or indirectly.
"Profitability is also an area of divergence. Global respondents rate this as the seventh whereas in Australia this is ranked 16th. This reflects the level of anxiety around the ability of global banks to maintain profitability in the current environment. For Australia this is less of an issue where our banks continue to have a robust return on equity.
Opportunity in Crisis
Mr Scoular said despite the gloom, bright spots were also apparent.
"It's easy to focus on the negative but we should also ask ourselves where the opportunities lie," he said.
After emerging from the Global Financial Crisis largely intact the Australian banking sector feels well prepared.
"When asked how prepared are you to handle the perceived risks the Australian respondents - all of whom were bankers - have scored higher (3.25 out of 5) than the global average (2.96).
"Those countries that reported lower score from this question also included responses from regulators and industry observers who may hold a less optimistic view.
"But one lesson Australian bankers did learn from the GFC was that greater risk spells increased opportunity for those with strong balance sheets. And any fresh ructions to global banking could well open a window for Australian banks to grow offshore.
"We should not underestimate the challenges ahead. But the Australian banks are well placed to continue growing in a relative sense compared to their global counterparts."
About PwC
PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 161,000 people in 154 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See pwc.com for more information.
"PwC" is the brand under which member firms of PricewaterhouseCoopers International Limited (PwCIL) operate and provide services. Together, these firms form the PwC network. Each firm in the network is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way.
PwC Banking and Capital Markets Leader Stuart Scoular said Australia's banks are well positioned to capitalise on any weakness in the global environment despite remaining vulnerable to uncertainty.
According to the survey, which polled more than 700 bankers, regulators and industry observers globally, the top risk in 2012 is the state of the world economy (macro-economic risk) caused by the threat of sovereign default by several European nations, followed by concerns over credit risks and liquidity.
Mr Scoular said the 18 Australian survey respondents largely shared the concerns of overseas counterparts but an increasing divergence from earlier surveys was also displayed. For example:
- Political interference rated second in Australia and fifth globally.
- Emerging market concerns rated ninth compared with 22nd globally.
- A high dependence on technology rated at number six in Australia compared with 18th globally.
Our Vulnerability
The pall of Europe's sovereign debt crisis looms heavily over the survey's respondents."Although Australia can boast to be one of the world's strongest banking systems, this study demonstrates the acute sense of vulnerability around how overseas events which are largely outside of our control may impact us" Mr Scoular said.
"The European debt crisis is the most obvious, but there is also lingering unease over emerging markets - China's growth in particular - and whether they can continue to act as a counterbalance to the weakness weighing on much of the developed world."
Mr Scoular said although China remained a global growth engine, strains were building internally, including the threat of asset price bubbles and an undercapitalised banking system.
"Add to that the presence of a poorly understood shadow banking system and the risk is that if China does suffer a hard landing at some point then the effects could be far reaching."
The Regulatory Risk
"Regulation is near the forefront of respondents' minds in Australia because much of it has been driven from overseas to cure problems that were, and essentially remain, overseas problems," Mr Scoular said.Mr Scoular said Australia's strong regulatory environment is one key reason why its banks emerged from the Global Financial Crisis in such a strong position.
"Local respondents are asking the question why they are being subject to new rules that were designed to curb behaviours that were never a problem for the Australian system. There is a sense among Australian banks that they are being unjustly penalised."
Mr Scoular said that the extra burden created by new regulations was loading new costs and requiring business models to be revisited at the very time the banks are attempting to trim costs to cope with the headwinds battering revenue growth momentum.
"As far as the local industry is concerned there is never a good time for new regulations but much of this does appear to be happening at a particularly bad time.
"Increased regulation is likely to lead banks to change their business models and the products offered. For example, deposits with greater than 30-day withdrawal notification periods should become more common as will higher charges for undrawn facilities.
"The task ahead for the Australian banks is how to navigate the regulatory maze. For the most part the industry is well placed to address regulatory reform."
How Australia differs
Mr Scoular said despite mirroring the top concerns from overseas, in some areas the Australian respondents have a divergence of view from their overseas counterparts."We are less pre-occupied with capital availability and corporate governance while technology dependence has continued to creep higher since 2008 when it was rated the 11th major concern. It is now number six compared with 18th globally. This relates to the fact that many Australian banks continue with significant system infrastructure projects with any delivery related issues potentially having a significant impact, not only on customers, but also the bank's reputation.
"Interestingly, the Australian respondents see emerging markets as a more significant risk than their global counterparts - rating emerging markets as the ninth most significant risk compared to 22nd globally. This will largely be due to our proximity to Asia and our relative exposure to those markets - either directly or indirectly.
"Profitability is also an area of divergence. Global respondents rate this as the seventh whereas in Australia this is ranked 16th. This reflects the level of anxiety around the ability of global banks to maintain profitability in the current environment. For Australia this is less of an issue where our banks continue to have a robust return on equity.
Opportunity in Crisis
Mr Scoular said despite the gloom, bright spots were also apparent."It's easy to focus on the negative but we should also ask ourselves where the opportunities lie," he said.
After emerging from the Global Financial Crisis largely intact the Australian banking sector feels well prepared.
"When asked how prepared are you to handle the perceived risks the Australian respondents - all of whom were bankers - have scored higher (3.25 out of 5) than the global average (2.96).
"Those countries that reported lower score from this question also included responses from regulators and industry observers who may hold a less optimistic view.
"But one lesson Australian bankers did learn from the GFC was that greater risk spells increased opportunity for those with strong balance sheets. And any fresh ructions to global banking could well open a window for Australian banks to grow offshore.
"We should not underestimate the challenges ahead. But the Australian banks are well placed to continue growing in a relative sense compared to their global counterparts."
About PwC
PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 161,000 people in 154 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See pwc.com for more information."PwC" is the brand under which member firms of PricewaterhouseCoopers International Limited (PwCIL) operate and provide services. Together, these firms form the PwC network. Each firm in the network is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way.
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- Mathew Charles
- Communications Manager, Sydney
- Tel: +61 2 8266 0270
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