Banks Try to Put Past Sins Behind Them at Davos

Chris Ratcliffe | Bloomberg | Getty Images

Leaders of the world's largest banks have gone some way to persuading investors that their industry's near-death experience is over, even though the public still doesn't trust them.

However, a recent rebound in banking shares - which has pushed the Thomson Reuters Global Banks index up five percent this year - possibly hides a crisis still threatening the existence of many in the sector as its leaders meet in Davos.

The Libor rigging scandal, rogue trading, mis-selling, the breaking of anti-money laundering rules and debate over staff bonuses have all ensured the banks remain in the dog house, four years after the financial crisis brought many to their knees.

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Banks and financial service companies were once again at the bottom of the pile in the Edelman "Trust Barometer", released this week in Davos where many bankers are attending the World Economic Forum. Although they scored slightly better in the survey of 26 countries than last year, only 50 percent of respondents said they trust banks and financial institutions, against a 77 percent score for technology companies.

Many are producing profits for shareholders again, but the rules of the game have changed and banks and their advisers recognize it will take years to rebuild public confidence.

"Banks need to change their business models. Financial service providers need to be reminded that it all about service to clients and clients need to be put back at the core. Self-interest has to take a backseat," Axel Weber, former Bundesbank chief and now Chairman of Swiss bank UBS, said on Wednesday.

With senior industry figures predicting that only a handful of major global banks will emerge stronger from the financial crisis, the outlook for those that do not is uncertain. JPMorgan, HSBC and Bank of America Merrill Lynch are those most often mentioned among the winners, with smaller players suffering from higher capital requirements, a low interest rate environment and stiffer regulatory demands.

This has prompted action to cut costs and focus on what bankers often describe as their "core competencies". UBS, for instance, has cut 10,000 jobs and pulled back from areas such as fixed income trading. Many banks have also staged wholesale retreats from certain businesses, such as commodity trading, or selective withdrawals from countries or regions.

Some, including JP Morgan Chairman and Chief Executive Jamie Dimon, say the basic banking model is not broken and that the excesses of the pre-crisis period have been curtailed. "You want financial services, you just don't want them to be leveraged or (to) blow up," Dimon said during a panel discussion involving bankers, regulators and politicians.

Others at Davos say banks have largely put their shops in order and are now concentrating on trying to make money.

"Generating earnings in this environment is not that easy; we have gone from crisis mode to normal boring stuff about how will the business grow," one senior banker told Reuters.

But others such as Weber think an overhaul is still required for the industry to reinvent itself. "Banks need to get a new the same time we need to deal with the legacy. You need to separate from the past, that's a necessary condition. We need to move forward in a different mode," Weber said.

Regulatory Respite

The mantra of putting customers first echoes around the corridors in the Swiss Alpine ski resort, but this is still drowned out by protests about the unintended consequences of regulations aimed at preventing another crisis.

"We should have better regulation, but not necessarily more. We will not achieve (economic) growth unless we have a proper financial industry that lends money that fuels growth," said Andrey Kostin, Chairman and Chief Executive of Russia's VTB Bank.

One of the unintended consequences of the regulatory drive which has followed the financial crisis is, say bankers, greater consolidation of the industry.

So rather than preventing banks from being "too big to fail" after the collapse of Lehman Brothers, the drive to require them to hold more capital and more liquid assets in the event of markets drying up, has had the opposite effect.

"The irony is that the big are getting bigger," the senior banker said, adding that the costs of developing IT was an example of where scale was critical. "If you don't have a substantial business, it just kills your margins," he added.

The industry has fought back against some of the regulations and earlier this month successfully convinced the Basel Committee on banking supervision to push back the date by which they must increase their so-called liquidity buffers.

Behind The Bounce

A period of greater stability in the euro zone has been one factor behind investors' interest in bank stocks. European banks dominate the top 10 risers in the Thomson Reuters Global Banks Index, with seven spots.

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Shares in the benchmark Eurostoxx 600 banks index had already risen 23 percent last year, clawing back much of the 33 percent loss in 2011. Gains came as banks tackled costs and investors took heart from the European Central Bank's promise to do "whatever it takes" to preserve the euro.

Analysts had expected a more muted start to 2013, but Europe's banks have risen another 7.5 percent in the year to date. Banks on the troubled "periphery" of the euro zone have enjoyed the biggest 2013 increases. Eight of this year's top 10 performers are from countries such as Italy, Ireland, Greece, Portugal and Spain - those which have gained the most from relative euro zone stability.

But some in the industry say this may provide only temporary respite for the banks that are no longer able to compete on scale with the big "universal" global banks.

"We will see more do what UBS did. It is pretty hard to make the numbers work. None of the investment banks are having an easy time of it at the moment," the senior banker said.