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2020 Was a Fantastic Year for Bank Stocks. Can It Last?

The banking sector has enjoyed record profits thanks to the market euphoria created by central banks. What happens next keeps many awake at night.

Myret Zaki
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Looking at the Swiss banking sector’s 2020 results, it is difficult to imagine that these figures were produced in the midst of a world pandemic. And yet, be it in terms of profits, managed assets,staff increase, or top management compensation, banks have had a fantastic year 2020. Working in a bank, one could feel almost schizophrenic when reading the newspapers and listening to friends working in the restaurant or travel sectors. The gap with the rest of the economy is almost embarrassing, but is mostly revealing the big disconnect between the Olympus in which money flows operate and the real economy and its terrestrial limits.

Banks enjoy tailwinds from client trading

To understand how the banking industry can generate such results while the economy is shut down or sometimes in shambles, one can browse the banks’ annual reports and understand how deeply correlated their figures are with booming markets and strong client trading. Which are in turn deeply correlated to central bank actions and monetary policies, whose support to financial markets was unprecedented.

The pandemic situation also boosted the tech investment boom. This was a secular trend that was already there before the pandemic, and the crisis propelled it even further. But again, it owes much to central banks. Cheap venture capital and private equity funding helped sector valuations inflate like never before, as did the cheap borrowing to trade and transact in those stocks.

Or, to understand the phenomenon, one can simply stroll along the streets by night. Walk past bank buildings in Zurich or Geneva. Look at their front door signs illuminating the pavement, or their reflection glittering in the lake. And think how different financial services are from bars, theatres, cinemas, bookstores, airports or public swimming pools. While these banks are still in brick and mortar, their finely designed offices mainly harbor computers. Their activity – related to money saving, trading, investing – happens virtually, and serves people and places way beyond these walls. Banking doesn’t need hygiene.

Compensation surges

The share price of UBS is up 85% since the March 2020 market bottom. Profits are up, managed assets and workforce numbers increased as well. The new UBS CEO, Ralph Hamers, credited for being a «digitizer», received 4,2 million francs in compensation after only two months in office in 2020, while the departing CEO Sergio Ermotti gained 13,5 million for his last ten months at UBS. Which brings the total amount UBS paid to its CEOs in 2020 to 18 million francs. A luxury year.

Ralph Hamers also gained 1 million francs for his last 10 months with his previous employer, ING Bank, which brings his 2020 total to 5,2 million francs. That is more than double what he earned at ING Bank in 2019, a supposedly much milder year. Looking at ING’s 2020 annual report, we observe that here too, profits, managed assets and staff, all increased in 2020.

Julius Baer, whose share price is up 113% since the trough, saw a surge in its net profit and fresh inflows of invested assets as well, while Vontobel attracted big client amounts at its asset management arm.

Credit Suisse lags behind

The exception that proves the rule was Credit Suisse. Even while its share price climbed 73% since March 2020, the number two Swiss bank performed poorly last year. But even in this case, it wasn’t because of Covid. The bank had to provision for the collapse of the UK fund manager Greensill and to restructure its asset management.

Regardless of isolated cases of liquidated funds, legal provisions or debacles, that happen also in pandemic-free years, the general trend was exceptional, also for the regional banks. ZKB made a group profit of 865 mio. francs and recorded an increase in managed assets, adding 35 people to its payroll.

As to Geneva’s private banks, they had a record year. Pictet, Lombard Odier or Union bancaire privée (UBP) all reported record profits. The flows of new money, combined with the rise in markets increased their client assets, together with the commissions they collected. Crisis, what crisis?

Margin lending reaches record high

Yet banks have kept cool-headed. They know how much they owe to central banks and to the very special conditions they enjoyed thanks to the crisis, including massive quantitative easing, loosened capital requirements, and the prolonged zero interest rate regime. Without these low rates, people would have borrowed much less, which means that we would have seen a very different market performance.

Easy money is what creates market euphoria, such as the record one we are experiencing. According to the latest data on margin trading in the U.S., compiled by advisorperspectives.com, investors in the S&P 500 have never invested as much borrowed money.

Quelle: Advisor Perspectives

The current market rise – and banks’ results - are extremely dependent on cheap liquidity. The Bank for International Settlements has shown at the end of last year how this factor alone explains most of the rise in US and European markets.

How long can banks and their clients keep borrowing money for free? You can bet this question is what keeps many bankers awake at night, much more than the pandemic.

Myret Zaki

Myret Zaki started in 1997 as a junior analyst in a Geneva private bank where she learnt the basics of equity research, before joining the daily newspaper «Le Temps» in 2001, where she was in charge of the finance section for 9 years. When the financial crisis broke in 2008, she wrote the investigative book «UBS, am Rande des Abgrunds» (originally published in French as «UBS, les dessous d'un scandale»), for which she received the Schweizer Journalist prize. She joined «Bilan» magazine in 2010 where she became Chief Editor from 2014 to 2019. Between 2010 and 2016, she wrote three other bestselling books, about Swiss banking secrecy, the end of the Dollar reserve status, and the rise of the shadow banking system. She has a Political Science Bachelor from the American University in Cairo and an MBA from the Business School of Lausanne. She is now head of the Communication faculty at the School of Journalism and Media in Lausanne.
Myret Zaki started in 1997 as a junior analyst in a Geneva private bank where she learnt the basics of equity research, before joining the daily newspaper «Le Temps» in 2001, where she was in charge of the finance section for 9 years. When the financial crisis broke in 2008, she wrote the investigative book «UBS, am Rande des Abgrunds» (originally published in French as «UBS, les dessous d'un scandale»), for which she received the Schweizer Journalist prize. She joined «Bilan» magazine in 2010 where she became Chief Editor from 2014 to 2019. Between 2010 and 2016, she wrote three other bestselling books, about Swiss banking secrecy, the end of the Dollar reserve status, and the rise of the shadow banking system. She has a Political Science Bachelor from the American University in Cairo and an MBA from the Business School of Lausanne. She is now head of the Communication faculty at the School of Journalism and Media in Lausanne.