RISK MANAGEMENT

IMF Report Identifies 9 Banks That Could Struggle With Profitability in Coming Years

In its biannual Global Financial Stability Report, International Monetary Fund identified nine banks that could struggle with profitability in the coming years.

The banks are Deutsche Bank AG, Citigroup Inc., Barclays, Société Générale, Italy’s UniCredit, the U.K.’s Standard Chartered PLC, and Japan’s Sumitomo Mitsui Financial Group, Mizuho Financial Group and Mitsubishi UFJ Financial Group.

“About a third of banks by assets may struggle to achieve sustainable profitability, underscoring ongoing challenges and medium-term vulnerabilities,” the IMF said in its report.

The IMF said the consensus among private-sector bank-industry analysts was for a return on equity of less than 8% for each of those nine banks in 2019. In previous research, the IMF has said that banks’ cost of equity is at least 8%. Financial institutions need to earn above this threshold to remain consistently profitable and otherwise may face difficulty building capital, said the IMF.

Despite these projections, the IMF report said that overall, the largest banks have become “more resilient since the crisis with stronger capital and liquidity.” Together, the largest banks have higher capital ratios, more liquidity and fewer assets than at the beginning of the decade.

The report also cited progress at U.S. banks in particular that raised capital and unloaded noncore businesses. The other seven U.S. banks that are considered systemically important— State Street Corp., Wells Fargo & Co., J.P. Morgan Chase & Co., Goldman Sachs Group Inc., Morgan Stanley, Bank of New York Mellon and Bank of America Corp.—were expected to be profitable through 2019.

By 2019, just 29% of assets in the systemically important financial institutions are expected to be in laggard banks, down from 39% over the 2012-16 period and 51% from 2008 to 2011.

The IMF said regulators should urge their bank to resolve nonperforming loans, drop unprofitable lines of business and develop plans to save the bank in case of failure.

“Without a more concerted effort to reduce nonperforming assets and improve business models, financial stability concerns could be reignited in the euro area,” the IMF said.

 

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