Global banking sector grows by 40%

Global banking sector grows by 40%

In 2020, the worldwide banking sector suffered a setback as a result of the coronavirus pandemic's economic impact, as indicated in the sector's overall market capitalization. However, as the global recovery continues, the banking industry has recouped the majority of the losses sustained during the health crisis.

According to Finbold statistics, the global banking sector's market capitalization increased 39.62% between Q2 2020 and Q2 2021, increasing by €2.1 trillion from €5.3 trillion to €7.4 trillion. On the road to recovery, the market cap fell marginally to €5.2 trillion in 2020 Q3 before rising 17.3% the following quarter.

Between April and July 2021, Spain's BBVA bank achieved the highest total shareholder return rate of 19.7%, followed by France's Société Générale at 13.8% and Spain's Banco Santander at 12.1%. Barclays of the United Kingdom is the worst performer, with a TSR of -8%. Banking Hub provides data on the worldwide banking sector's market capitalization.

How did the banking sector maintain growth?

The market capitalisation is being boosted by the widespread reopening of economies as a result of the vaccine distribution. Additionally, banks, particularly those in developed economies such as the United States and Europe, have benefited from policies designed to cushion the economy from the pandemic's detrimental consequences. Notably, the majority of banks' decision to maintain a low-interest environment has benefited them.

It's worth remembering that banks found themselves in a pickle during the pandemic. Historically, the banking sector has been seen as the economy's guardian, but the pandemic also sank the banks. Profits in the banking sector were negatively impacted, as they are highly dependent on the business cycle and interest rates.

Simultaneously, banks implemented measures such as cautious lending owing to repayment uncertainty, which had a direct impact on profitability. Banks, on the other hand, were tapped to assist the delivery of stimulus packages, therefore increasing their capital reserves.

It's worth noting that institutions such as the European Central Banks extended banks' ability to use their capital buffers freely until 2022. By assisting banks in maintaining expansion, this alleviates concerns about depleting capital buffers as the health crisis continues to weigh on banks' balance sheets.

Additionally, the crisis demonstrated the importance of banks maintaining sizable capital reserves that can be activated in the event of economic instability. Although most banks have previously depended on assets for future cushioning, a catastrophe such as the coronavirus need additional capital because asset sales are difficult in such an environment.

Apart from the policies, existing operational risk management measures supported the banking sector's revival. All financial market players were put to the test, and the majority of significant institutions successfully invoked business continuity plans. The measures ensured that the financial markets remained orderly and efficient.

Other factors have aided the sector's revival, such as increased adoption of pre-pandemic trends such as digitization and sustainability. Consumers who are eager to complete transactions online have embraced digitization of business. Simultaneously, the digital revolution has acted as a competitive force in the sector, with institutions that have built an online presence reaping the greatest benefits.

Notably, during the third quarter of 2020, the recovery was threatened by concerns about the pandemic's second wave. However, the sector maintained its gains following the vaccine's distribution. Additionally, the industry appears to be unconcerned about the Delta variation in 2021.

The banking sector's future

By maintaining market capitalization for two consecutive quarters, the banking sector's reaction to the health crisis appears to be bearing fruit. However, it is too early to tell whether the recovery would be sustained.

The rally will be put to the test, even more so when central banks discontinue all stimulus measures. However, banks will eventually need to adapt their operations to shifting consumer behaviour.