Projected Trends in the Banking Industry for 2015, Part 2

A Series Identifying Trends, Challenges and Opportunities Banks and Bankers Will Face in 2015


In Part-1 of this three-part series, Banking Reports, Ltd. Research, a leading banking industry research firm, identified the first three, out of a total of 10, trends that will impact the banking industry throughout 2015, including: Apple Pay, FED rate-hike and African banking. In this second installment, we will take a look at trends in the Chinese banking system, crypto-currencies and commodity-sensitive economies.

Trend #4: The Chinese Banking System

There are three fundamentally important things to watch in 2015 in terms of Chinese banking: transition, growth and credit-cycle.

  • Transition: The Chinese banking system has been in a transitional mode since the 1970s.This is a slow transition from a socialist/communist banking system to a market economy-compatible banking system. This transition is manifesting in three major fields: (i) Renminbi becoming fully convertible, (ii) The interest-rates applied by banks becoming liberalized, (iii) The ownership-structure of the Chinese banking system opening up towards foreign capital and domestic private investors. In all of the three, the Chinese banking system is somewhere around 70 percent of the way complete in its transition. The key questions for 2015 regarding transition are: Will the transition slow or speed up? Will any of the three key areas of transition reach a real market-economy maturity[1]?
  • Growth: Chinese banking assets have been growing significantly faster than Chinese GDP in the last 10 years. This growth overall resulted in a stunning expansion of the balance sheets of Chinese banks. The growth of a banking system and the growth of a real economy are always heavily intertwined. So, there are three questions to watch this year: (i) Will the dynamic growth of Chinese banking assets continue? (ii) Will the dynamic growth of the real economy in China continue?[2] (iii) Will the two – growth of banking assets and the growth of the real economy – be sufficiently sychronized?
  • Risks: The key question is: When will the Chinese banking system face its first serious decline in its credit-cycle? We think that there is a cca 30 percent chance that 2015 will be a difficult year in Chinese banking in terms of long mounting risks reaching a critical level. So, what are these risks?
    • NPL[3] Rates: Are the currently low levels reported by major Chinese banks realistic?
    • Shadow Banking System: There have been numerous reports in western media of the Chinese Shadow Banking System. This is an uncharted, but potentially huge, territory of virtually unregulated small- and mid-sized financial services providers in China. The most imminent risk is that many of these Shadow Banks are collecting a growing amount of deposits and sometimes some of them show certain signs of Ponzi-Scheme type of activity. What if a domino effect of illiquidity hits this sector? Would the panic transfer into the well-regulated banking system?
    • Off-the-balance-sheet Items: There is a rumor that Chinese banks have an attitude of pushing distressed assets off their balance sheets. The question is if the extent of this is in normal ranges or if it has reached a certain point where the sheer amount of smart accounting is too much.

The major challenge ahead of the Chinese banking system is to manage the transition and keep up the growth while containing the risks. We see serious risks in the Chinese banking system both inherently and externally from being derived from a slower GDP growth rate in the real economy. Due to the sheer size of the Chinese banking system these risks are worth watching very closely.

Trend #5: Crypto-Currencies

BitCoin is becoming more and more of a household name as the best known Crypto-Currency. Launched on the 3rd of January 2009, much as a form of reaction to the financial crisis amounting from the meltdown of Lehman Brothers, it has gone through a volatile, but exciting journey. BitCoin has been truly transformative and revolutionary, but we think that, as the representative of the 1st generation of online currencies, it is too early for a sustainable global breakthrough. Why?

  • 2nd Attempt: When markets transform and new technologies emerge, the first wave of attempts often end up being the ‘learning-cycle’. Can you remember palm-tops? Yes, those were smartphones. But, they were the first wave. They proved unsuccessful. But, just when market-players withdrew, a new wave, or the ‘2nd Attempt’, emerged with I-phone as the truly globally transformational flagship. This playbook is highly typical to new technologies. There are two mechanisms behind it: (i) During the course of the first attempt's failure, many market-players learn very well what the areas of dissatisfaction on the customer side are. And, they store this knowledge and start to innovate along these lines to correct the shortcomings of ‘Wave 1’. (ii) In the course of ‘Wave 1’ emerging and ending, customers hear, see and read much about the new technology, never really trying it though. So, by the time the ‘2nd Attempt’ appears, customers have an unclear but still existing prior knowledge of the issue. This makes them try ‘2nd Attempt’ in large quantities over a short period of time. We think that BitCoin and its contemporaries are ‘Wave 1’, and the truly transformative ‘2nd Attempt’ will appear within cca five years.
  • Size: Size matters when it comes to currencies. We think that the sheer total balance sheet of current online- and crypto-currencies is way too small for a global breakthrough. Important global currencies are currencies of large economies. USD, EUR, GBP, JPY and RMB all represent the economic powerhouses of the globe. CAD, AUD and CHF – with much smaller, but still significant economies in the background – are also important currencies on an international level, but are minuscule in terms of their importance compared to the USD. Speculations and other market moves make even these large nation-currencies significantly volatile. But, what happens if we look at smaller currencies? We can clearly see that these smaller currencies can be absolutely derailed by global capital moves. Even the Russian Ruble – not an insignificant currency – has lost almost half of its value in less than one year’s time. Even the large currencies can be attacked with significant success; we remember the speculative attack against the Bank of England in 1992. Huge amounts of liquidity and sheer size of total amount of a currency is a vital precondition of any sort of exchange-rate stability.
  • Price stability: Size determines the exchange-rate stability, well discussed under the prior bullet-point. Some extent of exchange-rate stability is vital for a long-lasting currency. But, when it comes to currencies, there are many other preconditions of success. One of those is some extent of price stability better defined as ‘well-anchored nominal prices denominated in the given currency’. What makes prices stable in case of a national currency? The fine tuning of demand and supply towards that currency. How is the demand and supply fine-tuned towards a currency? According to modern monetary theory (and practice) as we know it, a central monetary authority (almost always a national or central bank) has to take care of this fine and fragile equilibrium day-by-day, employing huge numbers of analysts, experts and dozens of powerful financial tools and a highly-sophisticated institutional background. Even with these resources, avoiding inflation and deflation can prove to be a serious challenge. We think that trust in the price stability of a currency is a precondition to its wide-scale usability, and current online- and crypto-currencies lack the sufficient institutional background that creates and sustains this trust.

We think that BitCoin is a tremendously constructive attempt, and many aspects of it will survive – e.g. blockchain technology – but overall it is premature. We think that a ‘2nd Wave of Attempts’ of online currencies will come within cca five years and probably reach a global breakthrough. An exciting trail to spot the likely origin of that ‘2nd Wave of Attempts’: a global online payment infrastructure, like PayPal, has a tremendous advantage when introducing an online currency.

Trend #6: Commodity-Sensitive Economies

Commodity-sensitive economies are countries that have a significant macro-economic exposure to commodity prices. These economies have had an easy time surviving the 2008 crisis and maintaining growth. High-commodity price experiences since the 2nd half of 2008 have radically changed in the final quarter of 2014. Crude is currently under USD 50 a barrel, and there is a significant chance of prices remaining low in the mid-run. This raises 3 key questions looking ahead to 2015:

  • Countries: Which specific countries will be hardest hit? We think that Russia, Brazil, Iran, Venezuela, Nigeria, Angola and Turkmenistan are at significant risk, but many others may face some extent of difficulties.
  • Extent of difficulties: What extent of difficulties will the low-commodity prices cause in the hardest hit countries? Two or three countries may technically go bankrupt due to this new condition. But, the big question is if Russia will be among these. We will address the risks in the Russian banking system and macro-economy in more detail in Part 3 of this blog-series.
  • Deflationary pressure on commodity importers: This is a counter-intuitive process, but low energy and commodity prices may result in an unwanted deflationary pressure hitting the commodity-importing countries. Deflation can seriously hit the already weak growth-prospects of many European countries and can be a force to slow the positive results of Abenomics down in Japan.

The major challenge ahead of commodity-rich countries is to seriously start to diversify their economies. Some will fail and some will succeed, 2015 will be a decisive year in this process.

For more information on developing trends in the banking industry, check back with the Blog for more future insights and check out part-1,

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Editor's Note:

David_Gyori_executive_director_of_Banking_Reports-428375-editedThis post was written by David Gyori, Executive Director at Banking Reports, Ltd. Research. Mr Gyori advises banks and bankers on how to win in a changing global banking-landscape. He has been working as a banking researcher and consultant for nearly 15 years. His favorite methodologies are research-based report-writing and research-based consulting. He is an enthusiastic squash player and a coffee-lover.

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[1] Reach 100 percent on our imaginary scale.

[2] It is well known that Chinese growth levels have been recently cooling down from the 10 percent per annum rate to the territory of the 7 percent per annum rate. This is what analysts call the ‘new normal’ referring to mid-term Chinese growth prospects. When using the expression ‘dynamic,’ we refer to this 7 percent per annum territory.

[3] NPL = Non Performing Loan

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