Banking and Finance – overview 2021 and plans for 2022

With recent years fresh in mind, 2020 was characterised by an initial extreme uncertainty caused by the pandemic. It quickly transformed into a strong market recovery fuelled by unprecedented governmental support and set the tone for positive and stable markets in 2021 with equity indices reaching new highs. Looking forward in to 2022, the expectations on the financial markets is more of a palpable sense of uncertainty and several dominant narratives now converge, pulling investor risk sentiment in different directions. The positive narrative in 2020 and 2021 of stronger growth, economic recovery and low inflation, supported by favourable central banks’ monetary policies, appears to have come to an end and are no longer given. The rate of economic growth has slowed down from the post-pandemic rebound in all major markets combined with elections and political uncertainty – expectations of a long term favourable economic environment is starting to fade. The overall economic picture will probably remain decent at global level. However, expectations matter most when assessing investment opportunities, and these now seem to be more set around a protracted rebound and decelerating growth with the threat of further Covid-19 restrictions still lingering and supply bottlenecks that pose challenges to industry activity and drive prices upwards.

“Unless inflation reveals itself as a transitory phenomenon, as most central banks tend to argue, the current levels in combinations with real interest rates being substantially negative could quickly compound and erode capital and purchasing power significantly.”

From a private wealth management perspective, the most notable risk for 2022 is certainly inflation, a forgotten threat that has returned well above expectations. For European clients, whose  financial wealth largely is held in cash or cash deposits, this has not been a major issue in times of low to zero inflation. Unless inflation reveals itself as a transitory phenomenon, as most central banks tend to argue, the current levels in combinations with real interest rates being substantially negative could quickly compound and erode capital and purchasing power significantly. Effectively protecting an investment portfolio from inflation can be quite a complex exercise, which goes well beyond simply adding some commodities or inflation sensitive assets. Wealth managers will need to carefully guide their clients through this process using institutional grade tools and techniques to shelter their wealth from a risk that for some time has disappeared from the radar.

ESG is a topic that will be pivotal for Banks, as corporate actors, wealth managers and clients going forward, and will fundamentally impact and change the financial industry in the years to come. Starting with ESG, climate change is obviously a no-brainer.  But 2022, will also see the continuation of the rise in prominence of the “S“ and “G” element in ESG. Impacts of the pandemic, other social movements, or scandals linked to poor governance that have highlighted also the importance of topics such as inclusion, reduction of inequalities in society, and solid governance principles.

“(…) the role of the Asset Manager will be to guide the clients through this complexity, identifying the most suitable solutions and make sure that the clients objectives and risk tolerance are fully understood and met.”

If SFDR (Sustainable Finance Disclosure Regulation) was a milestone in 2021, it was just the start of a regulatory journey that will continue into 2022 and onwards, most notably with the MIFID updates around client’s sustainability investment preferences. The topic is on top of the political agenda driving reforms and implementation of regulations that impact both service providers and clients. Wealth managers will face the challenges around the changing regulatory frameworks, adapting risk appetite, governance frameworks, strategic direction, defining and providing clear products and services that fulfils what they promise. The clients face a complex set of products creating uncertainty around what they are actually investing in. Again, the role of the Asset Manager will be to guide the clients through this complexity, identifying the most suitable solutions and make sure that the clients objectives and risk tolerance are fully understood and met. All financial institutions also need to ensure that ESG risks are firmly embedded in their Board agendas and in the operational, financial and credit risk framework to ensure that the impact of climate change on industry sectors and the potential adverse effects on banks existing and future exposures and capital requirements are taken well into account.

In addition to ESG risks on credits, increased capital requirements stemming from the Basel III reform is expected to come into force in 2028. In combination with the persistently low interest rate environment, the banks will be under pressure to manage their credit exposures profitably. Undoubtedly some of the costs arising from the increased capital requirements will be passed on to the customers with higher costs of borrowing as a result – how much is still to be seen. This change coupled with the increasing regulation for cross boarder activity is likely to see certain pockets of lending retracting when banks are looking to standardize and simplify their services even further to remain profitable. This tightening of credit conditions may also have impact on property prices especially for holiday homes or luxury assets that are less frequently financed by local universal banks due to more complicated cross boarder situations.

The impact of Covid remains exceptional for the industry. The forced upon practical challenges have accelerated and fundamentally changed established practices in the working environment. Employers and employees have realised and accepted the challenges and the benefits of remote working and clients’ interaction through digital channels. This evolution will continue in 2022 and the industry needs to leverage on the learning points experienced in the working environment and the client interaction, that is now more reliant on digital channels than ever before. If Covid has been the accelerator of this process, financial institutions will have to adapt to a new normal and clearly position themselves towards increased expectations from employees in order to remain attractive and retain talents in the market. Also, banks will have to continue to develop and invest in their technology and service propositions to cater for clients’ increasing expectations around flexible offering of the channels through which they wish to interact with their banks. For private banks, the question will not be which channel to focus on but rather on how to efficiently service their clients through the channel of their individual choice, providing the best possible customer experience in both direct customer interaction and in efficient execution of the services. This will require that Digital strategies and service propositions remain high up on the agenda together with thorough considerations on cost impact, investment strategies and IT security risks.

The constantly changing and tightening regulatory environment remains the highest priority for the financial industry going forward. It continues to impact the way the industry conducts its business, the operational environment, the costs and resources required and needs to be addressed with diligence, improved technology and efficient access and collection of relevant information.

All in all, it will remain challenging and inspirational in the financial industry in 2022 and onwards.

Lars Rejding
Group CEO
Banque Havilland S.A.

(source: AGEFI Luxembourg (French version))