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The Three Stooges

19 Jan 2016 By Antony Currie

America’s banking laggards prove that cuts alone don’t, well, cut it. Morgan Stanley and Bank of America both had pitiful fourth quarters last year, despite slashing more costs. Bosses James Gorman and Brian Moynihan have some decent businesses – as does Mike Corbat’s Citigroup, another weak performer. But the three banks aren’t eking out anything like the returns investors expect.

The return on equity at Morgan Stanley and BofA was around 5 percent annualized for the three months to December, according to Monday’s reports. That’s half what’s required for big banks to cover their cost of capital, usually pegged at around 10 percent.

It’s true that relative high-flier JPMorgan only managed to squeeze out a 9 percent ROE for the last quarter of 2015, and Goldman Sachs may report roughly the same on Wednesday excluding the cost of last week’s $5 billion mortgage settlement, according to estimates compiled by Thomson Reuters. But single-digit ROEs are unusually low for these two banks. For BofA, Citi and Morgan Stanley, inadequate returns have been the norm since the financial crisis.

It’s not for lack of trying. They have sold and closed businesses, shrunk their balance sheets and laid off employees. But they haven’t managed to keep revenue rolling in at the rate needed to parlay lower expenses into better returns. Tough capital requirements and low interest rates are two culprits. These affect the entire industry, but BofA, Citi and Morgan Stanley have perennially found themselves playing catch-up.

Moynihan could still take a knife to expenses. At 69 percent, the ratio of operational costs to revenue at BofA last year remains high. The firm’s ROE for the whole of last year just topped 6 percent. A 60 percent efficiency ratio would have taken it above 8 percent.

Citi’s efficiency ratio last year was an impressive 57 percent, but the bank suffered because capital is tied up in bad assets and unused tax breaks. Morgan Stanley’s fixed-income trading unit, meanwhile, remains the firm’s Achilles heel.

All three weaker banks would look better if regulators approved capital reductions or the Federal Reserve raised interest rates sharply. Neither is likely any time soon. Moreover, when either does happen, better-performing rivals will benefit, too.



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