Bank ROE roller coaster: the point of no return
For several years, bank chief executives have harmed their credibility by promising medium-term earnings targets that they have never come close to hitting. Some have been ousted as a result. No more. In 2015 and beyond, 10% is the new 15% when it comes to projections of future returns on equity. Few are even hitting that lower target, which barely covers their cost of their equity. But there are signs that investors are starting to see the value in lower, less risky, more sustainable returns. And capital costs are falling. Could this be the end of the ROE roller coaster?
Illustration: Kevin February; research Tessa Wilkie
Large global banks have spent the years since the financial crisis raising equity, shedding assets, reducing risk and cutting costs in a now constant effort to reinvent themselves and present a credible business case for shareholders to invest in. But one thing keeps changing. Banks’ own forecasts of the return on equity they can promise eventually to deliver to those shareholders continue to shrink.
Banks that had earned over 20% returns in the era of untrammelled leverage that ended in 2008 cut their promise to shareholders in the years after the collapse of Lehman. But even as they delivered low single-digit returns on equity many still hoped as recently as 2011 that they could one day soon get back to returning 15% or even more.
Those hopes are now being dashed and one after another, large banks are cutting their medium-term ROE targets once more, while almost all still substantially underperform them in actual reported returns.
At the start of this year, analysts at Citi studied the low returns on equity for large developed market banks that have been a feature of the recovery from the crisis since 2009.