NEW YORK (BLOOMBERG) – The coronavirus pandemic spurred a turn toward nationalism around the world. Now banks are in the vanguard of the movement, central to government rescue efforts in the face of the worst recession since the Great Depression.
Intesa Sanpaolo, headquartered in Milan, is reinforcing an “Italy first” lending policy. Beijing-based Bank of China is retreating to its home market after a big push into the Middle East. In Frankfurt, Deutsche Bank put Indian expansion plans on hold while throwing resources at Germany. Bank of America is among several US institutions being more selective in their European lending.
A renewed national focus could choke off fledgling expansion by banks that were just rebuilding their global reach after the 2008 financial crisis abruptly ended an era of exuberance. A domestic pivot also will lock many lenders into markets where competition is intense and growth opportunities limited.
While the banks’ change of emphasis was spurred by the health crisis, it follows a tide of nationalism reflected in political events from Brexit, to US President Donald Trump’s America First policy, to a debate over the future of the European Union. That nationalism in turn may be sharpened by the pandemic: Curbs on overseas travel, state control of some key companies and trillions of dollars of emergency loans point to a strong government role in economies for years to come.
“We expect to see a strong focus of banks on their domestic market,” said Alexandra Annecke, a fund manager at Union Investment in Frankfurt who focuses on financial services companies. “The state guarantees for loans are organized on a national basis and banks will be serving their corporates at home first and foremost.”
The new priorities affect banks at different points on the arc of international expansion. The three biggest US institutions, a handful of European ones and most Japanese lenders have extended their international reach in the last decade and probably will continue to do so after this crisis.
JPMorgan Chase & Co, Citigroup and Bank of America say their global ambitions haven’t been dented by the pandemic. BNP Paribas, on the other hand, is the only European bank to have resisted shrinking its US presence since the last crisis. HSBC Holdings is increasing its focus on Asia. Japanese banks need to keep lending overseas because interest margins at home are almost non-existent.
“How many global European banks do we still have?” said Jan Schildbach, head of research for banking and financial markets at Deutsche Bank in Frankfurt. “Most hadn’t fully recovered from the last crisis; this one will just make their global ambitions harder to rebuild, if they ever can.”
Many executives say their credit decisions reflect greater caution everywhere rather than a deliberate decision to cut exposure to foreign markets. The US banks and several European counterparts have already raised provisions to the highest level since the financial crisis. That’s eaten into their profitability, and some say worse is yet to come. US banks have been more conservative, provisioning multiple times the levels of their European peers to date, based on the relative size of loan books.
Bank executives are keen to point out, however, that the crisis presents new expansion opportunities. Citigroup’s investment banking co-head, Manolo Falco, said retrenchment by the Europeans will thin out global competitors. Deutsche Bank’s head of corporate banking, Stefan Hoops, said the institution recently extended more credit in the US to companies including Disney as domestic rivals turned cautious. His boss, chief executive officer Christian Sewing, said he’ll “jump in” where rivals pull back.
As banks face constraints on capital and demand for more funds across the world, they’ll need to choose places where that limited capital can earn a better return. Many countries in Europe, with extremely low interest rates and slim margins, are unlikely to be at the top of priority lists of big international banks.
There’s another reason, rooted in the great financial crisis, that banks are eager to embrace their roles as part of the national solution to the current turmoil. The 2008 meltdown stemmed from banks’ poor lending and investment practices, yet they raked in hundreds of billions of dollars in taxpayer bailouts while the trouble they helped foment plunged millions of people into foreclosures and unemployment.
This time around, governments are relying on banks to funnel trillions of dollars in credit to crisis-hit companies. They vet applications, distribute the money and manage loans through their life cycle. In most cases, they also retain a chunk of the risk. There is voracious demand for this aid, and banks have set up teams numbering in the thousands to cope.
In Europe, given the crucial role large banks will play in propping up domestic economies even when the crisis is over, they “will be very reluctant for some time to take on new risks that are not directly related to helping their home markets in a post-Covid-19 world,” said Sam Theodore, a managing director at Scope Group’s research unit. “At margin, the large European banks will become less international, at least for a while.