1) Industry issues in the financial services sector
i) Cracks within the European financial system
Instability within the European banking sector is likely to be a feature of 2017. Of immediate concern is the Italian banking industry. Other than that, issues the banking industry suffers from have been known for years. In fact, many of them contributed to the financial crisis. Banks remain too big; are undercapitalised; and suffer from underperforming loan portfolios. Such institutions have also delayed implementation of a change agenda – 2017 might be the year when action is finally taken.
ii) Pressure on bank’s Net Interest Margin (NIM)
Net Interest Margin is a measure of the difference between the interest income generated by lending and the amount of interest paid out to depositors, relative to the level of interest-earning assets held by the institution. Within the EU, the average NIM earned by banks amounts to just 1.2 per cent. This contrasts with historic returns, where the average NIM ranged between three per cent and four per cent.
Why does this matter? Because the NIM typically makes up a large portion of a bank’s overall revenue. Reductions in this income stream decreases the pool of funds available to cover loan loss provisions, as well as the returns and dividends available to shareholders. Even today, almost a decade since the financial crisis began, defaults by borrowers continue to drag down bank profitability. So focus will be placed on finding ways to lower costs and improve bank efficiency.
iii) Inflation will re-emerge to the detriment of the UK housing market and some family budgets
In The Bank of England’s Inflation Report of November 2016, it sets out a central projection that UK inflation will rise from its current level of one per cent to around 2.75 per cent mid-2018 before beginning to fall back. This increase in inflation will reopen the debate about when interest rates will start to rise, given that this is the primary weapon by which inflation is controlled. And, when rates do start to rise in 2017, they are likely to have an adverse impact on both the UK housing market and some family budgets.
The UK’s housing market has been underpinned by an era of cheap money. As interest rates rise, it will have an adverse impact on the price of property. It will also impact family budgets. Should the era of cheap money start to come to an end, it could have a significant impact on the more than 50 per cent of borrowers who have a variable rate mortgages.
iv) Uncertainty surrounding Brexit will continue
No discussion about the future of financial services would be complete without mentioning Brexit. Next year will see continuing efforts made by the financial services industry to protect its interests following the referendum. Central to these discussions will be questions around access to the single market and passporting.
I don’t foresee the biggest banks to declare ane exist from Britain. However, there may be a “drip” effect of particular jobs being lost to other financial centres. I also don’t see 2017 to result in a loss of influence for the City of London. It has existed for over 400 years and survived depressions and world wars by adjusting to changing circumstances.
Read on for business predictions.