The Italian Banking System and Bad Debt Issuance - Is It Systemic?
There has recently been renewed concern over the high level of non-performing loans (NPLs) in the Italian banking system and the potential for a systemic contagion. This is not a new risk and as the chart shows, the bulk of these NPLs are from loans to made to business enterprises. Most of these loans turned sour in the period between 2009 and 2013.
What does the future hold for traditional banks?
The rise of new technologies has allowed for improved mobile connectivity, cloud computing and the 'Bitcoin' phenomenon. This has led to an increasingly negative narrative with regard to the future of existing traditional banks. Newer entrants into the financial services realm such as Paypal and Square are seen as potentially successful 'disruptors' of an industry facing increased scrutiny and regulatory zeal. Venture capital companies are clamoring to invest in new peer-to-peer lending schemes, with many seeing this as the future for lending into the next decade and beyond.
How stressed are South African households at present?
Despite the poor economic backdrop and the recent increase in interest rates, South African households generally still appear to be in reasonably healthy shape, particularly middle to high-income households. Elevated wage and salary growth and waning demand for credit have helped keep nominal growth in disposable incomes above the growth in household indebtedness since the last recession in 2008/9.
Emerging Market Corporate Bond Market
Where do the risks lie?The recent rise in corporate bond yields (widening in corporate bond spreads) has been one of the factors driving some of the recent negative sentiment towards global equity markets. The recent rise in bond yields, in part driven by a tightening in USD liquidity, has mainly been the result of the deteriorating global growth expectations and specifically earnings expectations in the energy and broader commodity sectors. As such, default risk or the perceived risk of default has risen markedly over the past six months and, in turn, leading to a general re-pricing of risk in the corporate bond market.