sábado, 12 de septiembre de 2015

sábado, septiembre 12, 2015

Why Banks Haven’t Finished Their Balance Sheet Diet

By Paul J. Davies


A branch of HSBC in the U.K. The bank has one of the highest risk densities in the top 10 systemically-important European banks and produces among the highest returns.
A branch of HSBC in the U.K. The bank has one of the highest risk densities in the top 10 systemically-important European banks and produces among the highest returns. Photo: Zuma Press


Higher leverage leads to higher returns, right? Well, not for European Banks.

New reporting standards show that the biggest Europe-based lenders still have many more assets per euro, franc or pound of equity than their U.S. rivals and yet their returns on those assets are just two-thirds of those at American banks.

Investors attracted by low valuations in the European sector should note that even the best performing banks face a battle to improve returns at a time when they have little hope of seeing any support from higher interest rates in the region.

Leverage ratios are in focus for European regulators as a way to guard against failure in the complex risk models that banks use to set capital requirements.

Before the 2008 crisis, U.S. banks had simple rules that set limits for balance-sheet leverage, while Europeans were judged only on risk-based capital.
 
In fact, both approaches had problems. U.S. banks took more risk on their books and made more use of off-balance-sheet vehicles that they later had to support. European banks, meanwhile, had far too little capital as they used leverage to juice returns from low-yielding assets.


As all banks try to hit more stringent rules on leverage, Europeans have further to travel in ditching assets that produce poor revenues and cutting their cost bases to match.

Investors can now see the difference between the regions more clearly after banks this year began publishing comparable numbers for balance-sheet size. New rules on measuring leverage exposure iron out most differences between how Americans and Europeans account for things like derivatives and off-balance-sheet exposures.


The results under this measure are stark. In Europe, the 10 systemically important banks that report the relevant data produced an average annualized return on assets of 0.45% in the first half of 2015 compared with 0.73% at six big U.S. banks, according to WSJ calculations.

Part of the difference is down to investment banking. U.S. investment banks have a bigger set of capital markets at home that drive more revenue, which helps explain why many Europeans remain reluctant to give up U.S. footholds.

Analysts at Morgan Stanley MS 2.98 % reckon that the investment banking arms of European banks are producing half the average returns on assets, as measured for the leverage ratio, that Americans make.

Risk is a factor, too. The more risk-weighted assets a bank has per unit of total assets, the more capital it needs compared with total assets and so the lower its leverage. For Europeans, this risk-density measure is 31% versus 50% in the U.S.



But higher risk, which also should produce higher returns, doesn’t explain everything. HSBC HSBC 3.78 % has one of the highest densities of the 10 European banks and produces among the highest returns. However, its returns are beaten by the two banks that have the lowest risk density: Nordea and UBS.

Conversely, Standard Chartered STAN 3.25 % has the highest risk density in Europe, but among the worst returns.

Most European banks have targets to increase capital, with some targeting leverage ratios explicitly. Regulators, especially in the eurozone, are also likely to force an increase in risk weightings to narrow the gap between core capital ratios and leverage ratios.

Even if Europe’s economic outlook starts to improve, its banks still need to be fitter and slimmer to take advantage.

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