Kristian Rouz — Largest international financials are facing hard times second straight quarter as underperforming economies across the globe resulted in a shrinking demand for credit, while developing economies have been hit by the over-the-top increases in non-performing loans (NPLs, or ‘bad loans'). Subsequently, while banks in advanced economies are cutting jobs against the background of lower earnings, led by Goldman Sachs and other Wall Street heavyweights, financials based in emerging markets are closing equity positions and adjusting to the new reality of a huge volume of NPLs.
In its bond market units, Goldman cut 8% of its workers in April, whilst the scale of layoffs in equities departments is comparable, with exact numbers having been not revealed publicly. The layoffs are a consequence of the bank's decline in commercial earnings and a reaction to the anticipated recession in the US.
"We continue to carefully scale our business relative to the environment, but have also chosen to remain targeted in our efforts. It is important to remember that cycles do turn, even if the timing of such inflections may be difficult to predict," Goldman's annual note to shareholders, published in late April, read.
The US economy added just 0.5% year-on-year in Q1, whilst labor market dynamics have been on the verge of frustration for the past two months, with the economy having added 200,000 new non-farm payrolls in April compared to 215,000 the previous month, indicating a slowdown in hiring. A slower economy means lower effective demand for credit, while Goldman's overseas operations are suffering damage from the US Federal Reserve's tightening policies and the dollar's strength.
Meanwhile, Paribas' cost reductions plan includes a 1 bln euro-worth package of cuts, with the bank closing its equity market positions, a negative sign to stock investors. As global demand for credit slumps following the slowdowns in real economies here and there, global financials exiting equity markets would be an obvious development. Yet, shares are posed to enter a bear market, exacerbating capital outflows from the emerging markets most exposed to international headwinds and commodity trade.
For instance, in January, the British bank Barclays Plc. terminated its equity operations in seven countries in the Far East and Southeast Asia in favor of its businesses in the UK and the US, contributing to the slump in Asian stocks the subsequent month.
Meanwhile, in China, the amount of "bad loans," or NPLs, turned into an "epidemic" last month, as defined by Hong Kong-based CLSA Ltd., Asia's leading independent brokerage. Commercial banks in mainland China are facing losses of roughly $1 trln in NPLs as a consequence of the real estate bubble in 2014, stock bubble in 2015 and the current financial uncertainty, CLSA said. According to their data, 15 to 19% of Chinese debt is NPLs, compared to official data of 1.67%.
The regulative concern in mainland China became particularly acute after CITIC Bank Corp reported a $147.37 mln in unauthorized withdrawals from their bill financing operations, whilst the AGBank reported a similar scam totaling at about $600 mln.
"China's banking system has reached a point where it needs a comprehensive solution for the bad-debt problem, but there is no plan yet," CLSA said.
As global banks struggle from New York to Shanghai, the risks of financial sector instability are stirring additional concern of real economy growth prospects in both advanced and developing economies, marring growth outlook elsewhere. The decline in effective demand for credit, reflecting already existing negative tendencies, might result in a vicious circle of bank sector instability and further slowdown in growth. Ultimately, the malfunction of banking systems and inept regulations are affecting real economies negatively, fueling the fears of a recession in the US, and a dramatic slowdown or credit collapse in emerging markets.