about 4 years ago • 3 mins
Low interest rates are making it harder for banks to earn a profit from loans, while the rise of fintechs has been weighing heavy on their wealth management businesses. Whatever are they to do?
Banks can’t charge as much on new loans they issue when interest rates are low, but they still incur the same admin costs they would if rates were higher – which puts pressure on their bottom lines for pretty obvious reasons. Of course, it’s worth remembering that changing rates (whether from low to high or high to low) can also create opportunities for trading businesses. When investors reshuffled their portfolios of bonds and currencies at the end of last year, for example, it boosted investment banks’ earnings to record levels.
Even so, banks have been cutting costs in a bid to save money. Royal Bank of Scotland, once the world’s largest company, announced last week it would make major cuts to its investment banking business and rebrand as NatWest – so named after its lesser-known but better-liked retail bank. And this week, HSBC, currently Europe’s largest bank, followed up last year’s plan of 10,000 job cuts with 25,000 more. Or, depending perhaps on your political views, 35,000 new job cuts 😉
Another way out of the mire for banks is through mergers and acquisitions. Analysts have been arguing for years that financial firms – banks, asset managers, and so on – need scale in order to, er, scale the challenges they face. Teaming up is one way of doing just that. This week, two Italian banks announced they’d merge to become Europe’s seventh-largest, while investment bank Morgan Stanley announced the purchase of E-Trade. It might hope that adding more strings to its bow will help it better compete with challenger banks. Except N26, mind you…
Banks probably need to accompany employee, business, and brand cuts with major internal reorganizations if they want to succeed in the long term. But pessimists might worry HSBC won't be willing to change its ways: the company’s still hiring in Asia despite announcing several job cuts focused on Europe and the US. Maybe it’s just hoping to hang on long enough for interest rates to rise and boost profitability in its loans segment…
There's been a wave of new investing services like commission-free stock trading, fractional share trading, and digital-first bank savings accounts with higher interest on offer than most traditional banks. Companies are likely hoping that “free” services will act as a gateway to investing activities that pay them larger fees. That's a boon for consumers no matter the stage of their investing journey: why not rinse them for all they're worth?
On Wednesday, over 150 Finimizers met in London to discuss the global shift toward renewable energy. Finimizers heard how firms like Saudi Aramco are investing outside of energy, and were cautioned not to try to “time the market”. Our new Pack, Investing in Oil and Gas, explains how the industry works, how it’ll likely adapt to any forthcoming challenges, and how you can invest in the energy industry.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.