UBS Chief Ermotti Says European Banking System Will Inevitably Face Consolidation

There is need for consolidation in the European banking system and this would become more and more inevitable with the passage of time, believes the chief of the largest bank of the continent.

A section of investors policy-makers and other industry experts believe that one of the biggest road blocks to the profitability in European banks is fragmentation. But in a television interview at the UBS European Conference, UBS chief Sergio Ermotti said that the issue is “not sustainable.”

“That’s something that as time goes by will become more and more inevitable, is part of the solutions. For sure consolidation needs to happen, in particular in Europe, where we see a lot of fragmentation that it is not sustainable,” Ermotti said during the interview.

The sector would become more “effective and more efficient” by technology, he further added.

Since the global financial crisis, issues related to trust deficit has plagued the European banks and as a consequence have been struggling to install confidence in them. There has been a fall of about 20 per cent in the banking index since the start of the year.

Ermotti said that the manner in which European banks would be viewed by consumers will not be easy to predict in the near future.

“Difficult to predict sentiment and investors’ approach. I think it is quite clear that investors are very reluctant to invest in our sector,” he said. “I do respect the merits and a more balanced approach to valuations in our industry but we have to recognize this is a very challenging moment,” he added.

While the European banking system is going through a phase of a low-interest rate environment and tougher regulations, a number of crisis-legacy issues, such as bad loans, have acted as headwinds for banks.

“We are getting very close to pre-crisis levels on a whole range of economic variables,” UBS’s chief economist also said in an interview.

The bank has predicted that the global growth for the entire of 2018 would be just below 3 per cent compared to the 4.5 forecast and attained last year. The situation was described as the “largest slowdown in global growth since basically 2012 – the euro zone crisis” by Arend Kapteyn, chief economist at UBS Investment Bank.

“We attribute most of it to the slowdown in global trade cycle – sort of pre-dating the tariff tension. But we are also seeing some signs of late cycle dynamic, some capacity constraints, confidence going down because of the tariffs, so it is a little bit unclear what to pin it down to exactly,” he said.

The role of the UBS in the causing of the global financial crisis would be investigated by agencies in the US justice department, the country’s authorities announced earlier this month. The allegation against the Swiss bank is it had misled investors with its risky mortgage-backed securities.

“We don’t believe there is any proof or any merit in these claimsm” Ermotti said.

“It is our responsibility to defend the interest of our shareholders. I think our bank lost a lot of money during the financial crisis by having position(s) in residential mortgage backed securities, so it is very difficult to argue that we were intentionally misleading investors,” he added.

(Adapted from CNBC.com)

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