Foreign Banks' Stock Outlook

Most foreign banks are still reeling under the impact of the global economic slowdown. In the developed nations, persistently low interest rates and subdued loan growth have been taking a heavy toll on banks. Coming to emerging markets, banks are primarily being hurt by corporates staying away from loans due to higher borrowing costs and a significant outflow of capital from their economies.

Moreover, recovery prospects of foreign banks appear bleak as global economic growth may slacken further. The latest global growth projection by the World Bank indicates a derailed recovery ahead. In Jun 2016, the bank revised down the growth forecast by 0.5 percentage points to 2.4% for this year and 0.3 percentage points to 2.8% for 2017.

Major downward revisions in growth forecasts were made for commodity exporting economies such as Brazil, Russia, Nigeria and Angola due to a downswing in commodity prices, weakening currencies and higher borrowing costs.

Japan’s growth forecast for this year was also cut by 0.1 percentage point to 0.5% on concerns that its negative-rate environment will fail to boost the economy.

However, China, the second largest economy of the world, has not seen a forecast revision by the World Bank. China is still expected to grow 6.7% with the help of its stimulus.

Further, the World Bank economists are concerned about the Federal Reserve’s faster-than-expected actions in raising rates causing a huge increase in borrowing costs. This might dampen growth in economies across the globe.

Dark Cloud Over Banks in Key Nations

The major European banks including Barclays (BCS), Deutsche Bank (DB) and Credit Suisse (CS) have lost significant value over the past year due to a dearth of business following negative rates and economic woes. The negative rates are forcing them to lend money to corporates and individuals, but this is not helping them in generating decent returns.

Moreover, the U.K. referendum to exit the European Union heightened their risks. Along with Brexit-driven uncertainties, bad assets on balance sheets and an unfavorable rate environment will hinder European banks from showing signs of improvement any time soon.

The prospects of the banks in Japan remained uncertain with the central bank leaving the interest rate unchanged at negative 0.1% at its Sep 2016 meeting. Though the central bank will introduce “yield-curve control” as part of its major policy overhaul to fight deflation, it is unlikely to benefit the banking system in the nation.

Further, in Jun 2016, Fitch Ratings has revised the rating outlooks for Japan’s mega banks including Mitsubishi UFJ Financial Group, Inc. (MTU), Nomura Holdings, Inc. (NMR), Sumitomo Mitsui Financial Group, Inc. (SMFG) and Mizuho Financial Group, Inc. (MFG) to “negative” from “stable.”

After a number of rate cuts last year in an effort to stimulate the economy, the benchmark rate in China currently stands at 4.35%, which is not unfavorable for its banks. However, the nation’s banks may not get any further support on the rate front as the central bank may not be able to raise rates any time soon. On the other hand, the economy’s credit vulnerability could be dangerous for its banking system.

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Chee Hin Teh 4 years ago Member's comment

thank for sharing

Chee Hin Teh 4 years ago Member's comment

Thanks fo sharing

Chee Hin Teh 4 years ago Member's comment

Thanks for sharing