Say goodbye to big banking profits
Banks will have to write down the goodwill of their wealth creation businesses, putting more pressure on the institutions' balance sheets, a banking expert has warned.
“Falling funds under management means falling revenue for these businesses, so the asset value will have to be written down by the banks," Satyajit Das said.
“It will wipe out all the goodwill the banks have put on these businesses.”
With falling demand for investment products, revenues for wealth creation businesses will be under pressure for a number of years, he told a joint Melbourne Centre for Financial Studies and Finsia event yesterday.
“With funds under management falling about 30 per cent globally, revenue will fall by a similar amount,” Das said.
Combined with all the other losses the banking system has incurred through collateralised debt securities, bad loans and other examples of financial mismanagement, the global banks will need about US$2 trillion of capital in the next few years.
“Then there is between US$5 to $10 trillion of core assets (securitised loans) now being put back on bank asset sheets,” he said.
“So far the banks have raised US$800 billion.”
Das said it is inevitable a number of global banks will have to be nationalised by governments just to save them.
“The banks will have to seek more public money so they will become nationalised,” he said.
Those banks that are not nationalised will still suffer from large amounts of debt brought onto their balance sheets from failed securitised investments that were sold during the past decade.
“Banks are not going to be the high value industry of the future,” Das said.
“So it is goodbye to big profits.”
He said Australian banks would also come under pressure as they would have to seek more expensive funding to shore up capital bases.
Australian banks will need $80 billion of refinancing during 2009.
However, compared to the US banking system's market capitalisation, which has collapsed, Australian banks have generally covered their funding liabilities.
The result of the global crisis means banks won’t be able to run the previous model of moving assets off the balance sheet through securitised vehicles, Das said.
“In the long term, the business model of banks is going to have to change,” he said.
“The bank industry will be re-regulated and there will have to be a greater amount of conformity.
“We are entering the age of lower returns from banking as we go back to the early 1980’s model.”
In Australia, earnings growth from the banks will come from consolidation and the withdrawal of their overseas competitors, Das said.
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