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Global banking space to be less 'fashionable'

June 18, 2009 16:59 IST

With the financial crisis triggering significant changes in the global banking space, the sector will become less 'fashionable' with greater government involvement and heavy regulations, a Deutsche Bank report says.

"No doubt, the banking sector is undergoing significant changes as a result of the financial crisis. It will become a less 'fashionable' and even more heavily regulated industry with greater state involvement, increased investor scrutiny and substantially higher capital levels," the report stated.

The changes are expected to lead to lower growth, lower profits and lower volatility for banks than during the past few decades -- a trend that is exacerbated by the expected lack of major growth drivers for some time.

Primarily, US banks stand to face difficult years due to low loan growth, higher credit losses and weaker revenues from capital-market activities, the report said.

Interestingly, consolidation in the space is likely to continue with a different focus of re-nationalisation and a re-orientation towards domestic markets rather than financial globalisation and market integration, it said.

This trend could partly reverse the globalisation of finance that had started to flourish just about two decades ago after the demise of communism and the opening of China and India, the report pointed out.

It might also reduce many of the benefits of globally integrated financial markets, the report added.

"While there will still be a considerable number of deals, transaction volumes may decline and restructuring stories rather than strategic M&A can dominate," the Deutsche Bank report added.

The report pointed out that the near-term prospects for the US and European banks are decidedly grim with the global financial crisis bringing about the most significant changes to their operating framework banks have seen in decades.

"There will be fundamental re-regulation of the industry, ownership structures are shifting towards heavier state involvement and investor scrutiny is rising strongly. Equity ratios will be substantially higher," it pointed out.

As a result, growth and profitability of the banking sector as a whole are likely to decline, it added.

Besides, the more general effect would be the vast destruction of confidence in banks and of their reputation.

"This may not have painful consequences in the short run as the demand for banking services is relatively inelastic. In the longer run, however, banks could feel strong negative repercussions," it stated.

Further, one of the greatest challenges for banks, apart from adjusting to a profoundly changed business environment, would be to repair their public reputation as soon as possible and regain the trust of clients, policymakers and the general public.

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