Winners in the Banking Industry

In my book European Jewels Banco Santander, I defined 3 competitive advantages that will provide the winners of the future in this industry. The banking industry landscape is changing. The old days of miraculous profitability are long gone. How will competitive forces and external environment evolve in the future?

Liquidity and Financial Strength

I believe that many banks are doomed to have low profitability in the long run. The banks selling good assets right now will have to keep low quality assets in the balance sheet in order to avoid write-offs. This will be a drag in those banks profitability. This is what is going to happen to many European banks all of them condemned to sell their good assets. On the other hand the banks with liquidity will avoid state intervention, sparing their shareholders to capital dilution, and will buy good assets at discount value.

First Move Advantages

On the interest rates side we know that interest rates will have to go up sooner or later which will put extra pressure on the banks’ gross margin. This will increase pressure on capital allocation. In order to achieve good profitability, banks will have more difficulties building a portfolio of assets that generate a good yield for low risk. Bearing this in mind we can divide the banks in two groups: the banks reacting and the banks with first move advantages. The banks reacting are desperately selling assets to bridge liquidity constraints. On the other side banks doing moves right now have the opportunity to select the good assets that will provide good yield for low risk in the future.

Solid Reputation

What about funding costs? Funding has been guaranteed by the ECB to many troubled banks that have completely abandoned the capital markets for long term financing. This is a distortion of the markets and as soon as the crisis stabilize this source of cheap money will end and the banks will have to return to the traditional sources of financing. The traditional cheap source of financing is clients’ deposits. The fact that those banks have solid reputation will defend them from interest deposit wars, and at the same time attract new depositors looking for safety rather than better yields. This will be the source of cheap funding of the future

The banks possessing these 3 sources of competitive advantages will emerge stronger than ever from this crisis.


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