The divergence in the returns that banks can sustainably earn on their increased capital is remarkable. Looking at reported return on average equity for Q3 2015 compared to Q3 2014, seven of our sample banks improved profitability, while seven suffered falls. Deutsche Bank’s latest abysmal quarter, following a similarly poor result the prior year, makes comparison meaningless.
Ten out of the 15 biggest G-Sibs are still reporting ROEs measured in single digits. And while most have cut the target 15% returns they were aiming for a couple of years ago down to between 10% and 12%, that is much more than most are delivering, with bank stock risk premia keeping cost of equity at between 10% and 11%.
The stock market seems to be coming round to the view that well capitalized banks are an acceptable investment even if they are returning less than 10%, as long as there is a credible path to that goal and no sign of excessive risk taking.