HomeEconomyBanking results: a decade of great stagnation masked by monetary policies?

Banking results: a decade of great stagnation masked by monetary policies?

[AVIS D’EXPERT] Although the banks have been posting excellent results for several years, in reality these are essentially related to the explosion of the money supply in circulation. Deciphered with our expert Guillaume Almeras, founder of the monitoring and advice site Score Advisor.

Of course, it is paradoxical to speak of the stagnation of bank results when, in recent years, French establishments have reaped profits in the tens of billions. Again this summer, on the occasion of the quarterly, in the face of a new string of excellent results, the commentators asked themselves: real performance or lucky break?

It is important to clarify the situation as, with the looming crisis and Credit Suisse’s setbacks, the specter of a bank collapse has recently resurfaced.

Based on the analysis of the Prudential Supervision and Resolution Authority (ACPR), we can, for example, start from the evolution of the RoE (remuneration of equity through profits) of the main French banking groups. Its last peak was reached in 2006. It was close to 15% then. After falling sharply in 2008, RoE rebounded to a new high of 8% in 2010. It has been stagnant below since:

This development is quite general. The same occurs with the other main results indicators, if we relate them to the activity of the establishments reflected in the size of their balance sheet. Thus, the average gross operating result, clinched around 0.7%. For years, everything has been stuck in a narrow tunnel, such as operating expenses, contained between 1% and 1.5% of the total balance. And the trend is generally down. This is particularly the case for net bank income (the equivalent of bank turnover), which has long hovered around 2% of the total balance sheet and has trended towards 1.5% since 2017. The same continues to happen with non-performing loans. , which is a good sign (on average it fell from 2.8% to 2.2%).

But then, how to explain the strong recent rise in results in amounts? It’s pretty simple. All of the above indicators are expressed as percentages of balances. But the size of balance sheets has skyrocketed! The phenomenon was particularly strong in France and Japan. Mechanically, the number of results continued, while performance stagnated.

What explains this phenomenon itself? Nothing but monetary policy. The incredible swelling of the money supply caused by central bank liquidity injections, often made through banks directly, at near-zero rates.

The Eurozone’s money supply increased from €1.1 trillion in 1980 to €4.8 trillion in 2000. In July 2021 it reached €15 trillion. Of this mass, liquidity (M1) represents 70%.

From 2015 to 2019, the growth of the money supply in the Eurozone experienced an annual rate of between 4% and 6%. To counteract the effects of the health crisis, the money supply increased by 9.6% between January 2020 and January 2021. Its growth then remained at 9%. Thus, while the almost free liquidity of the ECB could be replaced, even at low rates, in the markets, in particular those of real estate and corporate credit, protected against recession by the States (drawing themselves the liquidity of the central bank), Bank results naturally followed.

Today, given the environmental banking catastrophism, it should be noted that it is very difficult to predict the next results of the institutions. This is because, linked to monetary policy and the economic situation, the evolution of these results will largely escape the banks. And that is the problem!

What has happened in the last ten years? Banks have led a digital transition that is still far from complete and hardly generates new revenue. While the banking market is now under pressure from a host of new players. And while a renewal and expansion of traditional offers is still pending. A situation that could be serious if the latest flourishing results ignore its alarming nature.

Author: By Guillaume Almeras, founder of Score Advisor monitoring and advice site
Source: BFM TV

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