It's not easy to make a buck in the banking business nowadays. Remember the old days when banks just took in deposits and used that money to make loans? The future of banking might not look like that anymore. Weary of their abysmal results, attacks from shareholders and the watchful eye of regulators, banks are now thinking long and hard about how they do business.
Here, I share few of my thoughts of what might hold and reshape banking industry over the next few years.
Firstly, era for big banking is over. Low cost direct and integrated banking propositions will take over. Citigroup unveiled plans to split into two distinct entities, effectively bringing an end to its financial services "supermarket" model. Most successful banks will gravitate to a retail/commercial banking business model and this new model will rely on pulling customers in rather than pushing products out. More tailored-servicing, target segments and get to know their customers better in a much simplified model, focusing more on an integrated multi-channel distribution network rather than on branch locations. I believe only few players will be able to operate with truly simplified operating models pursuing economies of scale and become specialists, after all.
Secondly, non-traditional competition to drive innovations. It would not be surprise to see the entrance of non-banking entities such as retailers, telecommunication operators, energy companies etc to become niche players in some markets. The United Kingdom's biggest retailer Tesco said its personal finance unit would open a customer centre in Scotland, creating 800 jobs and bringing the group nearer to providing full banking services.
Thirdly, cost restructuring will drive higher return on equity. Banks will continue to remain highly regulated and renewed appreciation of risk will drive profit margins thinner. Either ones work on high leverage model and off-balance sheet earnings, otherwise, cost restructuring will be one and only one key factor that will jack up return on equity. Malaysian banks certainly will have much scope for cost reduction from current average cost-to-income ratio of 49.9% and it has the potential to be bought down to level of 30-35% and that essentially will translate of +30-40% rise in return of equity easily. That is only possible through alliances, shared services and sourcing models.
Fourthly, leapfrogging the competition with customer intelligence. Soon, risk analytics, customer analytics, pricing optimization and pro-active management of NPLs will become standard operating procedure for all banking players. With these new set of tools, this allows players to venture into low-cost and aggressively priced products, like retirement, life, health and home insurance and will also help to open doors for Islamic finance, microfinance and other products that focusing on sustainability like wealth management products.
Wednesday, August 26, 2009
Sunday, August 23, 2009
Too early to pop up champagne?
From time to time, it is necessary to get a bird’s eye view of the financial market. And given the market’s recent run-up, such a moment has arrived. A number of economic and financial variables have exhibited signs of improvement recently, even if macro indicators are still mixed. Indeed, the pace of economic deterioration has slowed significantly.
However, that does not mean the recession in the US is already over, as many analysts have argued. In the second half of 2009, I still expect policy measures will boost real GDP growth, albeit in a temporary manner.
Some of the so-called ‘green shoots’ observed in recent months can be defined as green shoots only if compared with the economic picture painted at the beginning of the year. The inventory adjustment will largely be over by the middle of 2010 as will the impact of the stimulus. Risk is that as the recovery in private demand will remain weak, the economy is poised to slip back to anemic growth, posing the risk of a double-dip recession.
Exhausting most policy measures now means that there will be little room for additional fiscal and monetary stimuli in the future. Policy measures entailing long term fiscal costs can only provide temporary stimulus to growth.
Structural weakness in consumer and housing market will persist even after the economy is out of recession. Productivity growth has held up, not due to innovation or productive investment, but due to aggressive cuts in labour and labour hours by firms.
I think that we are going to see another leg down when the current rally ends, just as the powerful rally following the initial crash in 1929, ended up dealing out severe losses to those who held onto their shares.
However, that does not mean the recession in the US is already over, as many analysts have argued. In the second half of 2009, I still expect policy measures will boost real GDP growth, albeit in a temporary manner.
Some of the so-called ‘green shoots’ observed in recent months can be defined as green shoots only if compared with the economic picture painted at the beginning of the year. The inventory adjustment will largely be over by the middle of 2010 as will the impact of the stimulus. Risk is that as the recovery in private demand will remain weak, the economy is poised to slip back to anemic growth, posing the risk of a double-dip recession.
Exhausting most policy measures now means that there will be little room for additional fiscal and monetary stimuli in the future. Policy measures entailing long term fiscal costs can only provide temporary stimulus to growth.
Structural weakness in consumer and housing market will persist even after the economy is out of recession. Productivity growth has held up, not due to innovation or productive investment, but due to aggressive cuts in labour and labour hours by firms.
I think that we are going to see another leg down when the current rally ends, just as the powerful rally following the initial crash in 1929, ended up dealing out severe losses to those who held onto their shares.
Thursday, August 20, 2009
Signs of Optimism?
Hedge fund manager, John Paulson purchased over $165mn shares of Bank of America Corp to become the banking giant’s fourth largest shareholder. Paulson was among the select few, who predicted the sub-prime debacle, so his allocation into financials may be interpreted as a nice vote of confidence from an unexpected source.
On the other hand, the US Federal Reserve made a few bold moves to promote its case for recovery as well. Bernanke announced his intent to cease the program of buying up to $300 bn of Treasuries in October, as a major economic lifeline may have served its purpose well. Additionally, banks have scaled back borrowing from Fed’s emergency short-term lending facility – a sign that the frozen credit markets have thawed considerably.
Finally, the Car Allowance Rebate System, popularly known as ‘Cash for Clunkers’ was expanded – allowing car buyers to receive vouchers for future purchases as automakers report dwindling inventories.
In 2Q earnings reports, retailers take centre stage as it still offers cautious projections, even though Wal-Mart and Kohl’s Corp beat expectations.
Despite favourable reviews by the Fed, major equity indexes gave up slightly during the week with the Standard and Poor’s and Nasdaq still flirting with 1,000 and 2,000 respectively. The economic data of the week offered mixed signals as retail sales surprisingly declined in July despite the popularity of the ‘clunker’ program, though continuous claims for unemployment benefits fell to the lowest level since April.
The anticipated re-birth of the consumer may be on hold for now as the Reuters/University of Michigan sentiment index fell again and individuals continue to worry about the state of the job market.
On the other hand, the US Federal Reserve made a few bold moves to promote its case for recovery as well. Bernanke announced his intent to cease the program of buying up to $300 bn of Treasuries in October, as a major economic lifeline may have served its purpose well. Additionally, banks have scaled back borrowing from Fed’s emergency short-term lending facility – a sign that the frozen credit markets have thawed considerably.
Finally, the Car Allowance Rebate System, popularly known as ‘Cash for Clunkers’ was expanded – allowing car buyers to receive vouchers for future purchases as automakers report dwindling inventories.
In 2Q earnings reports, retailers take centre stage as it still offers cautious projections, even though Wal-Mart and Kohl’s Corp beat expectations.
Despite favourable reviews by the Fed, major equity indexes gave up slightly during the week with the Standard and Poor’s and Nasdaq still flirting with 1,000 and 2,000 respectively. The economic data of the week offered mixed signals as retail sales surprisingly declined in July despite the popularity of the ‘clunker’ program, though continuous claims for unemployment benefits fell to the lowest level since April.
The anticipated re-birth of the consumer may be on hold for now as the Reuters/University of Michigan sentiment index fell again and individuals continue to worry about the state of the job market.
Wednesday, August 19, 2009
My Take on Auto Industry
Structural changes are taking place in global auto industry that destined to turn the US auto market from a leader to a laggard.
In the United States, General Motors Corp and Chrysler Group are losing market share because of the government takeover. For Chrysler, the partnership with Fiat SpA is unlikely to help much. Fiat is among the weakest of the European companies and has not been competitive in the United States since the 1980s. The US market is undoubtedly moving towards smaller automobiles. The trend is being fuelled by the new Corporate Average Fuel Economy (CAFÉ) standards for 2015 and it seems unlikely that the partnership will have the models to compete.
General Motors has the model range to compete in the United States. However, GM is doing much better in China, thanks largely to its joint-venture with Shanghai Automotive Industry Corp. Given the growth of that market, it will probably it makes most economic sense for General Motor to become Chinese-owned. Politics may delay this, but probably only for a few years.
Ford Motors Co has picked up market share in the United States from GM and Chrsyler’s problems and it may be in a good position here in the large US market – as the most effective manufacturer of the large automobiles that Americans continue to prefer – no matter what the government tells Ford to do.
Outside the United States, European manufacturers will find themselves increasingly confined to the luxury end of the market. On the other hand, Japanese and Korean manufacturers will continue to dominate their domestic markets and will continue to do well in the United States and Europe and in countries, where they have been able to establish viable local manufacturing operations and lower labour costs.
India’s Tata Motors Ltd is the newly emerging global auto elite. Its for-the-masses “Nano” has been well received and that could force other manufacturers to produce equivalent low-price models. It could expand the market’s size in India and other emerging markets much as Ford’s Model T did after its introduction in 1908 or Volkswagen AG ‘Bettle’ did in the 1950s and 1960s.
On the other hand, China’ top carmakers – Chery Automobile Co, Geely Automobile Holdings and Great Wall Motor Co are among companies that will see most growth in the automotive market of the decade to come.
Most muscle will be in Asia, investors should not be surprised.
In the United States, General Motors Corp and Chrysler Group are losing market share because of the government takeover. For Chrysler, the partnership with Fiat SpA is unlikely to help much. Fiat is among the weakest of the European companies and has not been competitive in the United States since the 1980s. The US market is undoubtedly moving towards smaller automobiles. The trend is being fuelled by the new Corporate Average Fuel Economy (CAFÉ) standards for 2015 and it seems unlikely that the partnership will have the models to compete.
General Motors has the model range to compete in the United States. However, GM is doing much better in China, thanks largely to its joint-venture with Shanghai Automotive Industry Corp. Given the growth of that market, it will probably it makes most economic sense for General Motor to become Chinese-owned. Politics may delay this, but probably only for a few years.
Ford Motors Co has picked up market share in the United States from GM and Chrsyler’s problems and it may be in a good position here in the large US market – as the most effective manufacturer of the large automobiles that Americans continue to prefer – no matter what the government tells Ford to do.
Outside the United States, European manufacturers will find themselves increasingly confined to the luxury end of the market. On the other hand, Japanese and Korean manufacturers will continue to dominate their domestic markets and will continue to do well in the United States and Europe and in countries, where they have been able to establish viable local manufacturing operations and lower labour costs.
India’s Tata Motors Ltd is the newly emerging global auto elite. Its for-the-masses “Nano” has been well received and that could force other manufacturers to produce equivalent low-price models. It could expand the market’s size in India and other emerging markets much as Ford’s Model T did after its introduction in 1908 or Volkswagen AG ‘Bettle’ did in the 1950s and 1960s.
On the other hand, China’ top carmakers – Chery Automobile Co, Geely Automobile Holdings and Great Wall Motor Co are among companies that will see most growth in the automotive market of the decade to come.
Most muscle will be in Asia, investors should not be surprised.
Sunday, August 9, 2009
What underlies the numbers?
Consumer credit outstanding, reported by the Federal Reserve, fell $10.3 billion in June, double the consensus expectations. Consumer credit outstanding is currently at a level last seen in October 2007 as consumers continue to retrench in the face of a dismal labor market and weak wage and salary growth. The current recession marks the first decline in revolving credit, predominantly credit cards, on record. Revolving credit has decreased $59.8 billion from the series peak. Consumers are clearly rethinking credit usage as credit gets more expensive.
On the job market, numerous employment surveys and anecdotal reports from businesses suggest the bulk of major layoffs are now behind us. The extent of the improvement and implications for the recovery may be exaggerated, however. What appears to have happened is that businesses slashed output much more dramatically than sales declined, producing a huge drop in business inventories.
Nowhere was this more dramatic than in the motor vehicle sector, where the swing in output was amplified by bankruptcies at Chrysler and General Motors. Moreover, the early success of the cash for clunkers program will boost sales through Labor Day and allow vehicle production to bounce back a little further and for a longer period of time. Employment losses continue to be exceptionally broad based, with 76,000 jobs lost in construction and 119,000 jobs lost in service-providing industries. One notable area of weakness is retailing, which saw job losses essentially double in July to 44,000. Layoffs also picked up in wholesale trade and distribution. On the plus side, layoffs slowed a bit in the financial sector and temporary staffing companies shed just 10,000 jobs, which is far fewer than seen earlier in the year. Manufacturers shed only 52,000 jobs in July, which was the smallest drop since July of last year.
Meanwhile, the US retailers suffered another ugly month last month as same store sales plunged 5.5% mom, making July the second worst month of the year for merchants. It’s a particularly important month as it serves as a lead-up to the back-to-school period, the second busiest time of the year for retailers. Several of the nation’s leading retail chains - including mall-based specialty sellers, teen clothing chains, department store chains and even discounters suffered declining same-store sales last month as consumers continue to shun non-essential discretionary purchases. July’s slump marked the 11th consecutive month of same-store sales declines and more than half of the retailers it tracks missed their sales estimates for the month. The outlook for the sector is clouded because for most of last year retailers used chunky discounts to lure shoppers into purchases. Now that the industry has embraced inventory discipline – Chinese manufacturers report very low order levels so far this year – there should not be a repeat of the clearance bargains that once drew shoppers’ interest.
At the same time, a publication that got a lot of attention came from Deutsche Bank, which predicted that half of all mortgage holders in the US, about 25 million householders, could end up underwater on their mortgages. This isn’t the first time we’ve heard exceptional numbers on upside-down borrowers. First American CoreLogic figures there were already 11 million homeowners in that position at the end of last year, and Moody’s Economy.com estimates 16 million American households were in negative equity at the end of 2009Q1, up from 10 million at the end of 2008Q1. Almost a quarter of owner-occupied homes had mortgage debt that exceeded the values of those homes at the end of June, according to data from Equifax and Moody’s Economy.com. That number rises to 32% when looking at the share of homeowners with mortgages that don’t have equity left in their homes. Nearly 10% of owner-occupied homes now have mortgage debt with loan-to-value ratios of at least 125%, and roughly half of those homes have mortgage debt with loan-to-value ratios of 150% or more.
On the job market, numerous employment surveys and anecdotal reports from businesses suggest the bulk of major layoffs are now behind us. The extent of the improvement and implications for the recovery may be exaggerated, however. What appears to have happened is that businesses slashed output much more dramatically than sales declined, producing a huge drop in business inventories.
Nowhere was this more dramatic than in the motor vehicle sector, where the swing in output was amplified by bankruptcies at Chrysler and General Motors. Moreover, the early success of the cash for clunkers program will boost sales through Labor Day and allow vehicle production to bounce back a little further and for a longer period of time. Employment losses continue to be exceptionally broad based, with 76,000 jobs lost in construction and 119,000 jobs lost in service-providing industries. One notable area of weakness is retailing, which saw job losses essentially double in July to 44,000. Layoffs also picked up in wholesale trade and distribution. On the plus side, layoffs slowed a bit in the financial sector and temporary staffing companies shed just 10,000 jobs, which is far fewer than seen earlier in the year. Manufacturers shed only 52,000 jobs in July, which was the smallest drop since July of last year.
Meanwhile, the US retailers suffered another ugly month last month as same store sales plunged 5.5% mom, making July the second worst month of the year for merchants. It’s a particularly important month as it serves as a lead-up to the back-to-school period, the second busiest time of the year for retailers. Several of the nation’s leading retail chains - including mall-based specialty sellers, teen clothing chains, department store chains and even discounters suffered declining same-store sales last month as consumers continue to shun non-essential discretionary purchases. July’s slump marked the 11th consecutive month of same-store sales declines and more than half of the retailers it tracks missed their sales estimates for the month. The outlook for the sector is clouded because for most of last year retailers used chunky discounts to lure shoppers into purchases. Now that the industry has embraced inventory discipline – Chinese manufacturers report very low order levels so far this year – there should not be a repeat of the clearance bargains that once drew shoppers’ interest.
At the same time, a publication that got a lot of attention came from Deutsche Bank, which predicted that half of all mortgage holders in the US, about 25 million householders, could end up underwater on their mortgages. This isn’t the first time we’ve heard exceptional numbers on upside-down borrowers. First American CoreLogic figures there were already 11 million homeowners in that position at the end of last year, and Moody’s Economy.com estimates 16 million American households were in negative equity at the end of 2009Q1, up from 10 million at the end of 2008Q1. Almost a quarter of owner-occupied homes had mortgage debt that exceeded the values of those homes at the end of June, according to data from Equifax and Moody’s Economy.com. That number rises to 32% when looking at the share of homeowners with mortgages that don’t have equity left in their homes. Nearly 10% of owner-occupied homes now have mortgage debt with loan-to-value ratios of at least 125%, and roughly half of those homes have mortgage debt with loan-to-value ratios of 150% or more.
Monday, August 3, 2009
US Housing Market – Bottom or Another Collapse?
Last few months, I saw a rash of positive housing data. The improvements in the Case-Shiller index followed the release of several equally optimistic government reports that showed increases in home sales and housing starts and a decline in inventories.
But I still in dilemma when unemployment rate soaring and rising mortgage rates could lead to a double-dip plunge for the housing market. We still have a ton of foreclosure inventory coming into the market.
The federal government’s effort to lower borrowing cost has been a big reason why the housing market has been able to stabilize over the past few months. Mortgage rates fell to a record low 4.78% in April. But now it appears the Fed’s effort to reduce borrowing costs is losing momentum, when the rates have increased in each of the past two weeks and demand for mortgage applications is beginning to wane.
In Bernanke’s Seminannual Monetary Policy Report to Congress, he indicated that the refinancing acitivity was somewhat elevated early in the year, probably due to low mortgage interest rates and the waiver of many fees and easing of many underwriting terms by the government sponsored enterprises. However, such activity moderated considerably when interest rates rose during the past few months.
Some 467,000 jobs were lost in June alone and about 6.5 million jobs have been lost since the recession began in December 2007, according to the Labour Department. Over the coming months, as many as 1.5 million jobless Americans will exhaust their unemployment insurance benefits, ending what for some has been a last bulwark against foreclosures and destitution. Unemployment insurance is a lifeline for 9 million Americans with payments averaging just over $300 per week, varying by state and work history. If more help is not on the way, by September a huge wave of workers will start running out of their critical extended benefits and many will have nothing left to get by on even as work keeps getting harder to find.
We remain oversupplied, with approximately 1 million ‘excess’ housing units for sale. More foreclosure inventory will likely hit the markets in the coming months too. Many of the filing moratoriums put in place at the state and industry levels have expired.
But I still in dilemma when unemployment rate soaring and rising mortgage rates could lead to a double-dip plunge for the housing market. We still have a ton of foreclosure inventory coming into the market.
The federal government’s effort to lower borrowing cost has been a big reason why the housing market has been able to stabilize over the past few months. Mortgage rates fell to a record low 4.78% in April. But now it appears the Fed’s effort to reduce borrowing costs is losing momentum, when the rates have increased in each of the past two weeks and demand for mortgage applications is beginning to wane.
In Bernanke’s Seminannual Monetary Policy Report to Congress, he indicated that the refinancing acitivity was somewhat elevated early in the year, probably due to low mortgage interest rates and the waiver of many fees and easing of many underwriting terms by the government sponsored enterprises. However, such activity moderated considerably when interest rates rose during the past few months.
Some 467,000 jobs were lost in June alone and about 6.5 million jobs have been lost since the recession began in December 2007, according to the Labour Department. Over the coming months, as many as 1.5 million jobless Americans will exhaust their unemployment insurance benefits, ending what for some has been a last bulwark against foreclosures and destitution. Unemployment insurance is a lifeline for 9 million Americans with payments averaging just over $300 per week, varying by state and work history. If more help is not on the way, by September a huge wave of workers will start running out of their critical extended benefits and many will have nothing left to get by on even as work keeps getting harder to find.
We remain oversupplied, with approximately 1 million ‘excess’ housing units for sale. More foreclosure inventory will likely hit the markets in the coming months too. Many of the filing moratoriums put in place at the state and industry levels have expired.
Sunday, August 2, 2009
Corazon Aquino – The Mahatma of Philippines
I didn’t know her personally, but had two short encounters in my years of covering SEA economies. She rose to prominence after the assassination of her husband, Benigno ‘Ninoy’ Aquino Jr in 1983, took the reins of one of the world's most volatile nations.
To me, she was a simple lady, with strong inspiration for her country. She wanted to make her country proud, standing at par with rest of its neighbors, and the people’s standard of living uplifted. In one of my meetings in the Philippines many years ago, she had demonstrated to me that she had the ability to win the hearts and minds of even her most formidable adversaries through dialogue and persuasion.
Corazon was an incredible individual. Her philosophy for life encompassed a whole range of topics, from politics to religion, an advocate for her strong Catholic faith.
I strongly believe that she will continue to be symbol of democracy in the Philippines – the democracy she helped install 23 years ago. The yellow colour, her favourite one, will remain the colour symbol of the non-violent after decades of brutal ditactorship – a rejection of violence and intolerance.
Like Ghandi, she will be remembered in the Philippines. Let us now unite in prayer for Cory. I have hugged the hope that in this woman will be the unquestioned leader and, having thus found her place in human evolution.
To me, she was a simple lady, with strong inspiration for her country. She wanted to make her country proud, standing at par with rest of its neighbors, and the people’s standard of living uplifted. In one of my meetings in the Philippines many years ago, she had demonstrated to me that she had the ability to win the hearts and minds of even her most formidable adversaries through dialogue and persuasion.
Corazon was an incredible individual. Her philosophy for life encompassed a whole range of topics, from politics to religion, an advocate for her strong Catholic faith.
I strongly believe that she will continue to be symbol of democracy in the Philippines – the democracy she helped install 23 years ago. The yellow colour, her favourite one, will remain the colour symbol of the non-violent after decades of brutal ditactorship – a rejection of violence and intolerance.
Like Ghandi, she will be remembered in the Philippines. Let us now unite in prayer for Cory. I have hugged the hope that in this woman will be the unquestioned leader and, having thus found her place in human evolution.
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