There are a number of issues that seem to be pulling stronger against shareholders becoming too confident about the long term future outlook of the banking industry who took a dent to their inflated ego's not so long ago when the Financial Crisis dawned upon the world and spawned financial destruction to every corner of the globe. At the time bankers fielded the blame for over exerting their liberal ability to create debt for which they passed on to consumers at an alarming rate not fully quantifying the negative impact it might stir within the system should a crisis unfold.
Eight years down the line the global financial system has yet to fully recover even after a buoyant effort from central bankers feeding the monetary system with trillions of dollars to halt the rot from setting in. However it is this exact action that has aided the disruption ploughing its way through markets as we speak and the madness has yet to stop with the latest move being that of introducing negative interest rates without testing their ability to withstand headwinds and finding momentum in tailwinds.
For banks, especially those in developed economies, the rate of interest has been kept artificially low hampering the earnings of these financial institutions as the rate at which they lent out couldn't be much higher than the rate the central bank would borrow to them as they stood to lose significant business to competitors not taking into account the dire financial situation being experienced by the average person in those countries.
This resulted in an inflationary impact on the balance sheet as more loans were needed to satisfy the profit demands of shareholders who would sell off at a whisper of despair being heard but the return on assets being driven down by the dismal spread that could be made from low rates.
The suppression of earnings made these banks seek out riskier assets, one of those being the birth of a new industry in the field of energy; shale gas producers in the US whose implicit goal was to loosen the grip on the economy's overreliance on imports of the much needed fuel powering the economy. They didn't bank on (excuse the pun) OPEC responding to such challenge by opening up their own production capacities and flooding the market with surplus oil.Investors flee banks that show sign of weakness, with Credit Suisse at 27-year low https://t.co/cYCb4pKxEM pic.twitter.com/qZfi42GWVr— Bloomberg Business (@business) February 12, 2016
Consumers may be excited by the prospects of lower energy costs but the consequential effect from a oil price war has not only unhinged the stability in the oil industry, it's plunged the profitability deep into the abyss. You'd agree with me when I say that the profitability of a business being funded by a bank has a direct influence on a bank's ability to turn a profit. What does this mean for banks?
Quite simply the overburdened balance sheet they've been dealing with is now at risk of being trimmed back if we start to see a failure of US shale producers , a cost which will ultimately be borne by shareholders who face reduced profits. But the outlook is made bleak by the fact that the profits which are expected to cover these losses should they arise are insufficient due to the low margins offered by the returns on loans.
Further compounding the problem is the emergence of a trend whereby central bankers are resorting to negative interest rates in an attempt to veil their fraught efforts at stimulating their economy. This will have a devastating impact on banks who aren't earning enough to keep investors interested. Who can blame investors for selling off banks they way they've done this week with such turbulent news that would send shivers down anyone's spine let alone the prospects of incurring huge losses in the processes.
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