Weak European bank earnings blamed on Basel III; US banks had best year since 2007, but will they lend?
Bank earnings out of Europe have been just OK while in the US, the FDIC reports that US banks had the best year since 2007. So what’s the story and what can treasuers expect from their banks?
In recent earnings releases, Credit Suisse, Barclays and HSBC all indicated that new regulatory rules on capital will hurt their return on equity and thereby limit their ability to grow earnings going forward. The banks are referring to the cost of new rules, particularly Basel III, which requires banks to hold on to more capital to cover the risk of losses (see related story here). HSBC even hinted at eventually relocating to Hong Kong because of balance-sheet levy it has to pay as a UK-headquartered bank.
As for the US, the Federal Deposit Insurance Corporation (FDIC) in its Quarterly Banking Profile said FDIC-insured commercial banks and savings institutions reported an aggregate profit of nearly $21.7bn in the fourth quarter of 2010, a $23.5bn improvement from a $1.8bn net loss in the fourth quarter of 2009. The FDIC noted that this was the sixth consecutive quarter that earnings registered a year-over-year increase.
So what is the state of banking for corporates? The short answer is that it’s variable. But treasurers are encouraged to more or less find out more about their banks; make sure it’s a good fit and not a waste of time. At a fall NeuGroup Treasurers’ Group of Thirty (T30) meeting, treasurers said banks that returned to credit as a loss leader without credible or viable offerings for the target customer are more likely to be seen as pests than not. T30 members said they would rather focus their conversations on banks that can truly deliver on their business needs and thus seem less desperate to make up the difference on an underpriced credit commitment.
In a statement included in the FDIC’s report, Chairman Sheila Bair encouraged banks to start lending again. “Insured institutions made considerable progress in 2010,” Ms. Bair said, noting an “improving trend in asset quality” were positive. “But cleaning up balance sheets is only a first step. Now, we are looking to the industry to take the next step, and begin to build their loan portfolios. The long-term health of both the industry and our economy will depend on a responsible expansion of bank lending at this pivotal point in the economic recovery.”
All well and good. Nonetheless, for treasury, a meeting of the minds between treasurers and their bankers on what business is profitable to the bank, and how profitable, is essential.