Resiliency, The Future of the Banking Sector

On account of the pandemic scenario and rising inflation rates, the banking sector is urged to remain resilient in the upcoming periods.               

FREMONT, CA: The banking sector has demonstrated remarkable resilience in the face of economic fluctuations, global crises, and customer demands. It is driven by its adaptability to change and its ability to embrace technological advancements. Additionally, its robust regulatory framework and risk management practices serve as pillars of strength, ensuring stability in times of uncertainty. Emerging markets and global economic growth present lucrative opportunities for the sector. The banking sector's resilience in 2023 will be fueled by its adaptability to technological advancements, robust regulatory frameworks, opportunities in emerging markets, lessons learned from the pandemic, and a customer-centric approach.

Various researchers have elucidated that high levels of capital and ample liquidity buffers are critically bolstering resilience in the global banking space to manage the radical changes taking place in the sector on account of unexpected external pressures. Wherein, the resilience of the formal banking space can often be contradicted by that of the non-bank financial sector, which faces increased regulatory scrutiny in the arena.

The gap in valuations between fintech and traditional banks are narrowing critically in recent times. This, in turn, posts customer growth numbers in an upward environment, and thereby, emerging as much more than a mere substitute for actual profitability in the banking space. However, the banking space is imprinting its footprints towards a period of stabilised volatility from a geopolitical and macroeconomic perspective in recent times, determining the nature of disruptions to be temporary or permanent.

The banking space is anticipated to remain resilient in the future, inconsiderate of the monetary tightening-recession paradox that is often faced by banks. However, it is anticipated that the average returns on equity for major global banks will likely rise from 0.5 to one percentage point per the beta effect of rates on net income, the key driver. This, in turn, is critically giving rise to the return of deposit margins for various banks. Monetary tightening into a recession critically raises concerns regarding loan losses, while regulatory action following the global financial crisis is limiting exposure to riskier segments in the arena.

Generally, robust consumer balance sheets limit asset-quality deterioration, especially with uncertainties harming equity markets and mergers and acquisitions (M&A). Wherein, with the macro-environment stabilising on a crucial note, a critical rebound in M&A and issuance is highly anticipated to remain in the global space.

Alongside this, banks are aiming to shift their focus towards expanding the customer base and services for improved banking resiliency in the sector. A critical rise in banking rates holds the increased potential to boost revenue for almost every lending business, and investors in the arena are opting for banks to nurture critical alpha factors. Income growth in the arena is crucially dependent on two varied arenas: ancillary services and serving the prior unbanked or underbanked. The ancillary services offered to clients generally feature small and mid-sized businesses in legal, advisory, and risk management capabilities, assisting clients with an effective understanding and mitigating carbon impacts.