http://www.theglobeandmail.com/repo...s-demand-ebbs-in-weak-rebound/article1697139/
Banks struggle to boost loans as demand ebbs in weak rebound
Grant Robertson Banking Reporter
From Monday's Globe and Mail
Published on Sunday, Sep. 05, 2010 11:53PM EDT
Last updated on Sunday, Sep. 05, 2010 11:55PM EDT
The head of Canada’s largest bank says the sputtering economic rebound has dealt the industry a tricky dilemma: how to boost lending when solid borrowers are increasingly hard to find.
Demand for credit, particularly from corporate clients, has dried up amid a stubborn economic recovery that refuses to take hold. Royal Bank (RY-T52.800.500.96%) chief executive officer Gordon Nixon said the banks must now find ways to build their lending operations – a key driver of their profits – without being coaxed into making unattractive loans just to get more business in the door.
“What you hope you don’t see happen is banks starting to do stupid things again,” Mr. Nixon said in an interview, referring to the past several years where credit was easy to come by, and banks around the world were all too eager to lend.
“Right now we’re in an environment where demand for credit is very, very low … It’s not that credit isn’t available – there’s not a lot of demand.”
The stakes are higherThe stakes are higher today than they were a few years ago when credit was easy to get. The banks have emerged from a year when their provisions for credit losses, or the amount of money they set aside to cover bad loans, surged across the industry, eating into profits at all of the major lenders. With those numbers now falling, none of the banks are interested in repeating that scenario.
Despite that caution, banks must find a way to increase their loan books over the next few quarters amid a sluggish economy. Companies around the world spent the recession slashing budgets and many now find themselves cash-heavy and reluctant to invest. For the banks, that means competition for lending is the tightest it has been in years.
“You’ve got corporate balance sheets more liquid today than they have been in I don’t know how long,” Mr. Nixon said. “There’s a tremendous amount of cash sitting on balance sheets and companies aren’t borrowing.”
The key concern among the banks is to guard against “not being paid for the risk they are taking, because they are so desperate to grow their asset base,” Mr. Nixon said.
His comments come as Canadian banks emerged from a profitable third quarter which saw earnings in their retail banking operations rise, while the capital markets divisions generally took a hit due to the European sovereign debt crisis in May. RBC made $1.28-billion for the quarter, down 18 per cent due to the drop in capital markets.
The turmoil in the capital-markets divisions is seen as a temporary blip, and the banks are now looking ahead at the problem of building the lending business in 2011.
“To some degree you’re beholden to the overall demand in the marketplace. You can be aggressive in terms of your pricing [in lending]. But again, you don’t want to do things which all of a sudden result in taking risk where you’re not being paid for the risks,” Mr. Nixon said.
However, much is dependent on an economic recovery, particularly in the U.S. where the slowdown is proving particularly entrenched.
“People are arguing whether or not we’re going to go into a double-dip recession. I take a slightly different perspective: did we ever leave the first recession? Technically the answer is, yes, we did. But if you look at the capacity in the U.S. economy, it’s at a lower level than it was back in 2007,” he said. “We may be in a recovery phase, but it sure doesn’t feel like a recovery.”
The U.S. is bringing in regulatory reforms designed to curb the extent of risk-taking by banks, in hopes of averting another financial crisis. New rules on proprietary trading, where banks risk their own money in the market, could have an effect on RBC, but Mr. Nixon said he is waiting for more clarity on the regulations before making any decisions.
U.S. banks such as Goldman Sachs and JPMorgan Chase & Co. have already taken steps to dismantle their proprietary trading desks, shuffling staff to other areas in response to the forthcoming regulations. Proprietary trading represents about 10 per cent of Goldman’s revenue, the bank has said, while it is much smaller at RBC, at about 3 per cent. Based on the last quarter, proprietary trading is worth about $200-million in revenue for RBC.
Rather than shut down the desk, Mr. Nixon said RBC could transfer those operations to Canada, but stressed no decision has been made. “There’s nothing that prevents us from proprietary trading in Canada, as an example, relative to the U.S.,” he said. “There’s no question it’s a more user-friendly environment, and there’s opportunities to do things, not just for RBC but I think for international banks operating on a North American platform.”
I think it is very telling when the head of the largest bank in the country (and yes I realize he has certain vested interests) is questioning whether we in fact ever came out of the 2007 downturn and that the economy struggles. I have always felt the turnaround in the stock market and the rapid rise since 2007-2008 was unjustified and I am actually impressed to hear perhaps the truth coming from a CEO of a major bank.
George suggested that the banks intentionally tried to spread fear in the market place to get people to lock in a few months ago at higher rates.
I am not sure I buy this. However, perhaps George's theory may be correct. It would take a wide conspiracy and somehow I don't see the BOC governor, 5 major bank CEO's, other lenders all huddling in a room and saying how can we increase rates by effectively lying to the public.
I point out the article to simply say that if BMO and others bring interest rates down further, while this may prolong the buying more and more and people choose to buy, eventually (hopefully) the economy recovers and we have been over the interest rate argument rising and making it unaffordable.
The real question should be I believe: even if interest rates stay low, why should real estate escalate given that the reason they are staying low is that global demand for money is faultering because the economy everywhere essentially is very bad. Why should assets escalate in a bad environment.
Because as pointed out here by many real estate is at least a mid to long term investment, either you believe the economy will stay bad for a long time ( a sign that there should be no price escalation ) or it turns around in a couple of years, making the costs to buy/sell too prohibitive if the result of the turn around is an expected rise in interest rates making real estate more expensive.