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The new normal : Bank returns to plunge below cost of capital
Since the GFC 12 years ago global banks have strived to deliver ROE >10% which is approximately the cost of capital. The US banks were the most successful, JPN got close, many EUR and UK banks struggled and the CHN banks pursued different goals.
A recent IMF analysis models the ROE to plunge to a median near 5% in 2020. The situation will deteriorate further by 2025 with close to 95% of banks ROE below 10% and the median still circa 5%. Around 20% will have negative ROE for the next 5 years. The low interest rate countries are worst impacted.
https://lnkd.in/gKMyPBM
So what lies ahead for embattled banks....More cost cutting is inevitable. More attempts to grow fee income too, but this lemon is already well squeezed.
Why should investors stump up more capital with such paltry returns? There has to be consolidation. Expect the vulture funds to be hovering and arranged marriages or managed wind downs as the end game. It could get messy...
COVID-19 : Can banks survive the hits?
The credit hits are massive. The big 3 Japanese banks just announced credit provisions of ¥1.1tn ($10bn)for their current financial year. This after US and European banks collectively providing $50bn for credit losses in the first quarter.
Financial Times: Japan’s megabanks estimate a collective ¥1.1tn in credit costs
A growing number of central banks are warning of risks to financial stability, mainly from bank exposures to non performing corporate and household debt, but also from excessive risk concentration to asset management and hedge fund sectors.
Some central banks suspended bank dividends, others wish they had. Other policy measures such as reduced reserve requirements in several jurisdictions are more about relieving liquidity pressures on banks as repayments freeze than stimulating more lending.
In EME's the weak banks going into this crisis are going to be seriously struggling as the scale of credit hits becomes understood. Expect to see a flight to quality in each market as the situation unfolds. This will dial up the pressure on the outliers. Thereafter, expect hastily arranged banking consolidation, much as was seen post AFC and GFC.
The banks and central banks are better prepared this time, but expect some casualties..