“Bank of America and Citigroup, each with more than $1.8 trillion in assets, haven’t topped a 7 percent return on equity since the financial crisis. And ROA – return on assets, which measures how much profit a bank can make for every dollar of assets it holds – has also fallen. For 10 of the largest European and U.S. banks, profit on each $100 of assets on the balance sheet fell to 22 cents last year from 81 cents in 2006…

…Banks are dealing with minimum capital ratios, stress tests, and demands that more bank assets be the types that are easy to sell in a crisis. And when these are combined with tepid economic growth, well, things change for institutions trying to improve their return on equity.” Excerpt from March 2015 Mortgage Industry Newsletter

“I have read a lot of articles recently that talk about the record profits of the Too Big to Fail Banks in the U.S., but those record profits are only occurring because these banks are now required to hold more than double the capital they did pre-crisis and under Generally Accepted Accounting Principles (GAAP) capital does not have any cost. But in the real world of capitalism and markets, especially public markets, owners expect to earn a solid return on their invested capital. These big banks, like BofA and Citi, are trading around book value per share (or less), because at 7% or so ROE’s they aren’t meeting investor return expectations. In other words, since the financial crisis, banks like BofA and Citi haven’t shown they have a viable business model that deserves capital investment (Nice to be Too Big to Fail, isn’t it?). At some point, if these banks don’t substantially improve their returns on capital, their shareholders will become impatient and the stocks will fall well below book value per share. At that point simple finance/economics tells them to buy back their shares and shrink (all the way down to liquidation, if necessary).”, Mike Perry, former Chairman and CEO, IndyMac Bank

Posted on March 6, 2015, in Postings. Bookmark the permalink. Leave a comment.

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