Global banks’ outlook improves

Bank for International Settlements (BIS) released its BIS Annual Report 2012/2013 last month, showing that bank profit by country improved from the low post GFC levels, although earnings capacity remains weak across countries. BIS cited that retained earnings of major global banks rose above pre crisis levels (see Figure 1) and are a key contribution to capital along with volatile trading income.

Global bank retained earnings by country (US$bn)

Source: Bloomberg, BIS calculations

Figure 1

According to the annual report, the pre-tax return on assets for banks in Australia was 1.18% in 2012 that makes Australian banks the fifth most profitable in the world after BRIC countries. Russia was the leader in pre-tax banking profits with a sector return on assets of 2.39% caused by a sharp drop in loan loss provisions. China and India followed the trend with 1.83% and 1.45% respectively. The substantial increase in profits of Chinese and Indian banks was largely due to higher net interest margins and strong loan growth. Profits for Brazilian banks continued to slide from 1.61% to 1.50% in line with larger loan loss provisions, regardless of lower costs. Canadian and Swedish banks’ pre-tax profits were up by 0.27% and 0.12% due to higher net interest margins, decreased operating costs and consolidated gains made in previous years. Pre-tax profits in the United States improved from 0.42% to 0.96% in 2012 compared to the previous four years due to a fall in loan loss provisions. However, interest margins decreased from 2.52% to 2.34% in the same period. Japanese and British banks were just in the top 10 performers with 0.56% and 0.20 % increase in return on assets in 2012.

The report also highlighted the fact that banks improved their regulatory capital ratios by reducing risk weighted assets largely due to redesigning of transactions in order to lower capital requirements rather than genuine increase in loss absorption capacity (see Figure 2). The BIS data suggests that global banks sold A$720bn in assets since 2007 with European banks accounting for more than half the value of assets sold.

Risk-weighted assets as a share of total assets (%) Risk-weighted assets as a multiple of Tier 1 Capital (Ratio)

Source: Bankscope; Bloomberg; company financial reports; BIS calculations

Figure 2

Steady decline in bank leverage ratios also contributed to a better performance worldwide, especially for banks that successfully resolved their legacy assets. The constant pressure from regulators and investors appeared to improve the banks’ leverage levels (see Figure 2).

In addition, banks worldwide improved their capital ratios at a faster pace than set out in the Basel III phase in arrangements, with the average Common Equity Tier 1 ratio up from 7.1% to 8.5%, which is significantly higher than the 2019 requirement of 4.5% Common Equity Tier 1 ratio plus 2.5% conservation buffer.

Overall the BIS paper noted that, reduction in risk weighted assets and a steady decline in leverage as well as reductions in loan loss provisions and operating costs positively impacted banks’ balance sheets and established a more reliable earnings base in 2012 compared to post GFC period.