The year ahead for financial services looks upbeat, and financial firms will start to settle into a steady state, the Economist Intelligence Unit predicts in a new report.
The EIU says steady economic growth, higher interest rates and a leveling off of re-regulation will renew financial firms' confidence.
It says financial firms that thrive in this environment should have a leg up to face the future, but those that falter will have to rethink their business models rather than wait for better economic and operating conditions.
According to the report, moderate hikes in base interest rates in North America and the tapering of asset purchases in the eurozone should lead to somewhat higher bond yields, attracting investors back into fixed income instruments and taking some of the shine off stocks. However, central banks will proceed gradually, limiting the effects.
Whatever happens in the back and forth between stocks and bonds, investors will continue to seek out low-cost investment vehicles such as exchange-traded funds. The EIU predicts that the shift to such funds will run strong in 2018 as investors focus on reducing the fees they pay.
It also expects further consolidation among the providers of these funds.
A growing number of financial firms will return to levels of profitability that exceed their cost of capital in 2018, bolstered by stronger business volumes, improved operating margins, better returns on investments and the results of cost cutting.
The EIU finds, however, that many firms are poorly situated geographically to take advantage of the strongest areas of growth. They are overweight mature and developed markets and underweight faster growing emerging ones.
Then there is high-growth China, where insurance volumes are booming but few non-Chinese firms are in a position to benefit.
A large number of firms are still engaged in basic restructuring, and others that had to be rescued during the financial crisis are only now pulling themselves together as governments sell stakes and refloat them on stock markets.
Banks in Asia's big economies are out front in exploring new territories, gaining licenses in many markets around the globe, usually for simple branch operations, according to the report. They are avoiding complicated acquisitions and involvement with retail operations, and looking for corporate and investment business as companies from their home markets expand globally.
Regulatory Plateau
The EIU predicts that financial regulation will plateau in 2018. Firms still have this year to comply with core Basel III rules, which will go into full force in January 2019.
