Bank in alert over investor demands

Investors need to lower their expectations for bank profitability, as a 10% return on equity (ROE) is probably as good as large universal lenders can do, according to the CE of Europe’s biggest bank.

“If you’re a universal bank, much less risky than before, with considerably less leverage,” 10% probably is the new goal, HSBC Holdings CEO Stuart Gulliver said. With capital rules still in flux, he said banks have been struggling to answer shareholders’ question “how on earth can you get return of 12% to 13%? Well, you probably can’t.”

European banks have been trading at less than the net value of their assets since the credit crisis of 2008 prompted an overhaul of financial regulation, requiring lenders to add billions in loss-absorbing reserves. With profitability showing little sign of rebounding to pre-crisis levels amid anaemic growth and low rates, causing investors to shun the sector, regulators such as Mark Carney at the Bank of England have flagged the earnings power of banks as a “concern for financial stability”.

Investors still view 10% as the minimum acceptable level for return on equity, a closely watched measure of bank profitability, Gulliver said. Once regulators finish tweaking capital rules, that expectation — known as cost of equity — should fall to 8%. Gulliver said global banks like his own will eventually produce a return of 10%, a dividend yield of 4%-5% and will trade at about 1.1 to 1.2 times book value.

“That’s probably your kind of new framework,” he said.

ABANDONED TARGET

Before the financial crisis, HSBC generated a return on equity (ROE) of 16% and often traded at almost twice its book value. It made a 4.4% ROE in the first nine months of 2016 and trades below book value. In August, the bank abandoned its target of surpassing 10% by the end of 2018.