The Economist - USA (2020-08-08)

The EconomistAugust 8th 2020 Finance & economics 57

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tition, not stifled it. As recently as a decade

ago banking in China was a tortuous busi-

ness, requiring heaps of paperwork and

long queues. The digital duo dragged banks

into the online era. They also offered users

easy access to money-market products that

allowed them to get better returns than

available from banks.

More narrowly, they have improved the

landscape for payments. Their underlying

technology is simple, requiring just a

smartphone. Even the humblest of fruit

vendors can now accept non-cash pay-

ments. They have also lowered costs. They

charge merchants fees of about 0.6% on

transactions, down from the previous

norm of roughly 1% on debit-card swipes.

Regulators have already put roadblocks

in front of Alipay and Tenpay. The central

bank limited the size of payments they can

handle. It required that they hold customer

funds in a zero-interest reserve account,

denting their profitability. And it created a

centralised clearing platform, NetsUnion,

which Alipay and Tenpay must use, depriv-

ing them of exclusive transaction data.

Some in the payments industry see an-

other possible explanation for an antitrust

investigation. UnionPay, a state-owned

firm, used to be the only show in town for

handling card payments in China. As the

market has evolved it has struggled to keep

up with Alipay and Tenpay, and remains a

bit player in mobile. Many in UnionPay’s

upper ranks, including its departing chief

executive, are former central-bank offi-

cials. This raises questions about the cen-

tral bank’s impartiality when regulating

UnionPay’s competitors.

The timing of the mooted investigation

is also curious. The report came less than

two weeks after Ant Group, which controls

Alipay, announced plans for a long-await-

ed initial public offering, which could raise

as much as $30bn, making it the world’s

biggest-ever share sale. Perhaps someone

wanted to spoil the party. If nothing else, a

probe would serve as a reminder that Chi-

na’s government keeps its tech champions

on a short leash. 7

Power couple

China, non-cash retail payments, yuan trn

Sources:Analysys;People’sBankofChina;TheEconomist

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300

250

200

150

100

50

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1918171615142013

Debitcard

Credit card

Other

mobile

Tenpay

Alipay

Mobile

A

nalysts had expected a blistering

earnings season for European banks,

which reported their second-quarter re-

sults in late July and early August. And

painfully hot it was, with profits melting

away as lenders made provisions for future

loan losses. On August 3rd hsbc, Europe’s

largest bank by assets, said that its post-tax

profits had fallen by 88% on the year, to

$617m. Loss-making lenders included

Deutsche Bank in Germany, Santander in

Spain and Société Générale in France.

Much like Wall Street titans, albeit on a

smaller scale, European lenders with in-

vestment-banking arms saw losses tem-

pered by a boost in trading revenue. As the

coronavirus spread and markets turned vo-

latile, investors rushed to reposition their

portfolios. Many governments and compa-

nies took advantage of central-bank sup-

port and ultra-low interest rates to issue

debt, allowing banks to pocket fat fees. bnp

Paribas, France’s largest bank, saw trading

revenue jump by 154%.

Such frenetic activity seems unsustain-

able. Indeed, says Stuart Graham of Auton-

omous, a research firm, debt issuance ap-

pears to have slowed in July. So the fate of

banks will primarily be decided by the ex-

tent to which they are prepared for loan

losses. Lenders on either side of the Atlan-

tic have taken different approaches to the

matter, with European banks booking

smaller provisions, as a share of total

loans. American banks have generally been

more cautious in the past, only for Euro-

pean rivals to play catch-up (see chart). So

who is right this time?

There is reason to think America’s

banks may suffer more. Unemployment

there has surged; Coface, a credit insurer,

expects bankruptcies over the next year or

so to rise by more than in Europe. A larger

portion of American bank lending, includ-

ing consumer and high-yield credit, is risk-

ier and unsecured. European banks prefer

to lend against collateral, for example

through mortgages. That implies fewer and

slower defaults, as well as higher recovery

rates, when the cycle turns.

But the economic outlook is not the full

explanation. America’s accounting rules

require its lenders to make provisions

against losses they expect on all loans over

their lifetime. European rivals are required

to account for lifetime losses only on loans

that are closest to default (for performing

assets they need to care only about the next

12 months). That makes them mechanical-

ly more myopic. In March the European

Central Bank (ecb) encouraged more opti-

mism by telling them to “avoid excessively

pro-cyclical assumptions” when making

provisions—in other words, to ensure that

lending does not seize up in bad times.

Cultural differences compound pru-

dential ones. American businesses, fans of

transparency, tend to shoulder more pain

upfront. European ones prefer to wait and

see. Disclosure is not helped by the fact that

fewer banks are listed. Only half of the 84

euro-zone lenders deemed “significant” by

the ecbare publicly traded, says Nicolas

Véron of Bruegel, a think-tank. By contrast,

all America’s big banks are listed.

European banks’ smaller provisions

could also be an admission of weakness.

Most entered the crisis with a pre-existing

condition: low profitability. Patrick Hunt

of Oliver Wyman, a consultancy, says their

European banks expect fewer bad loans than American peers. Who is right?

Banks’ earnings

Dud light

Riseandfall

Sources: Datastream from Refinitiv; Autonomous Research *Forecast

FTSE 350

STOXXEurope 600

S&P 500

100-10-20-30-40-50

Aggregate Banks

Stockmarket index, % change Jan 1st-Aug 3rd 2020

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20*1510052000951990

Provisions for losses, % of loans

European banks

US banks