Banks are slowly approaching precrisis levels of
profitability, a new report found, though results vary significantly across
regions and markets. Since bottoming out in 2008 amid a world-wide economic
downturn, the global banking industry has steadily improved its depressed
return on equity, tallying 9.9% in the first half of 2014, up from 9.5% last
year and 5% in 2008, according to research released by consultancy McKinsey
& Co.
The industry is projected to make $650 billion in profit in
2014 with an ROE of about 10%, said Fritz Nauck, a senior partner in McKinsey’s
global banking practice. U.S. banks are leading the recovery, though
profitability is still well off precrisis highs. With profits of $114 billion
in 2013, U.S. banks earned slightly less than the record they produced in 2007.
Profits from the first half of 2014 are again on pace to produce more than $100
billion for the year, according to the report.
ROE for U.S. banks jumped to 9.3% in 2013 from 8.4% in 2012.
The consulting firm noted the industry’s returns are approaching a key level,
the banks’ cost of equity, estimated at about 11%-12%. The industry’s ROE
peaked in the mid-2000s at 17.4%.
The ROE for the industry compares with 17% for health care,
16% for technology, 11% for energy and 4% for utilities.
Banks in China and the emerging markets, while still
generating returns in the mid-teens, are in the midst of slowing growth, with
revenue in the largest Asian country growing 14% in 2013, down from 17.4% in
2012. Western Europe, trudging through the doldrums of a sluggish economy,
continues to lag behind—posting a 2% ROE in 2013, which was an improvement from
-0.4% in 2012.
World-wide retail banking revenue grew by $107 billion from
2011 to 2013, while wholesale banking grew at a more modest $85 billion over
the same period. Despite increased deposit volumes in the emerging
markets—including $80 billion in China alone—revenue from deposits, squeezed by
tight margins from depressed interest rates, fell $9 billion.
The year 2013 was also the first time in years that banks
didn’t have to raise additional capital to meet required buffer levels, the
report found. After raising more than $500 billion since 2009 in high-quality
capital, U.S. banks appear to have sufficient capital cushions, which may free
up banks to increase their ROEs.
From 2010 to June 2014, banks have paid more than $165
billion in fines and settlements, much of it incurred by banks in Europe and
North America. While banks have scrambled to make adjustments—recapitalizing,
deleveraging and shedding toxic assets—“regulatory reform has gained momentum”
and “shows no signs of diminishing,” said the report, forcing banks to cope
with higher costs.
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