FROM Frankfurt to Madrid, Zurich to London, it was a big week for PowerPoint. Executives from Barclays, Deutsche Bank, BNP Paribas, Santander and others spent their early mornings wading though slide after slide of second-quarter results for analysts and investors. The jargon was prolific. At Barclays the talk was of creating the “go to” bank and running down “exit quadrant” businesses; at Deutsche bosses affirmed “Strategy 2015+”. Everyone droned on dutifully about cultural change and values, while setting aside ever more billions in litigation-related charges.
Like the economies they serve, the overall picture is a patchwork. Big banks continue to repair their balance-sheets, some at a faster rate than others. Banks have already been increasing their risk-weighted capital ratios; now they also have to cater to renewed regulatory enthusiasm for “leverage ratios”, a blunter measure of the amount of equity that banks must hold that is gauged by their total assets.
Barclays announced a £5.8 billion ($8.8 billion) rights issue as part of its plans to meet a 3% leverage-ratio target for mid-2014 set by Britain’s Prudential Regulation Authority. Deutsche spelled out moves to reduce the size of its balance-sheet by 16%, or €250 billion ($330 billion), by cutting non-core assets, netting derivatives exposures and slimming unused lending facilities. (It is hard to think of another industry where you could lose a quarter of a trillion euros in assets and not have a big impact on earnings, but that’s banking for you.) UBS detailed plans to buy back the equity in a fund set up by the Swiss National Bank during the crisis to house its toxic assets; its capital ratio will go higher still.
Funding profiles are changing even faster. BNP’s retail deposits grew by 6.4% year on year. Barclays reported higher-than-expected deposit inflows, which reduced its loan-to-deposit ratio from 110% to 102%. Any ratio below 100% is regarded as more stable, because it reduces banks’ dependence on capital markets. Santander announced deposit growth of 7%, and a loan-to-deposit ratio of just 85% for Spain. At the high table of European banking a cleaner set of institutions is gradually emerging.
What that means for long-term returns is not yet clear. As well as facing dilution if they don’t buy new shares, shareholders in Barclays were told that the bank’s target for exceeding its cost of capital, meaning a return on equity (RoE) above 11.5%, had been pushed back a year to 2016. UBS delivered an RoE of just 7.2%; Deutsche managed a paltry 7% only by stripping out its non-core unit (ie, the really bad stuff); BNP took until slide 71 to reveal its RoE of 7.7%.
The banks argue that exceptional items like restructuring costs obscure the true picture. But there are real constraints on their ability to boost RoE. Reducing capital is not an option. Hiking revenues is a lot easier for banks that are not hitched to weak economies. Cost management is not something banks are known for (see chart). However slick the presentations, hard questions remain.