Wall Street just can’t shake its blues. In the most recent round of bummer headlines, Morgan Stanley has been accused of the same sort of high-pressure sales tactics as Wells Fargo, earning the entire industry a new tongue-lashing from Hillary Clinton. That prompted JPMorgan CEO Jamie Dimon to call the attack essentially hate speech, launching into a “not all bankers” tirade the very next day.
Clearly, feelings are a little fragile right now.
But with the release Wednesday of the International Monetary Fund’s semiannual financial stability report, American banks have one thing to cheer: at least they’re not in Europe.
The report - published as doubts continue to mount around the viability of the embattled Deutsche Bank - paints a dire picture of the European banking system. “Structural drags on profitability require urgent and comprehensive action,” the IMF said, noting a wide range of ills facing the sector, from the preponderance of nonperforming loans to still-weak capital ratios.
The IMF report doesn’t name any names, but in a press conference IMF capital markets Deputy Director Peter Dattels singled out Deutsche Bank, saying the sprawling German lender needed to “convince investors that its business model is viable.” The bank is expected to hammer out a multibillion-dollar settlement deal with U.S. regulators soon over mortgage misdeeds, a cost that has investors on edge.
Deutsche Bank isn’t alone. According to the IMF’s analysis, more than 80 percent of Europe’s lenders can be categorized as “challenged” or “weak” in terms of meeting a decent return on equity. Even in the case of a cyclical recovery—with higher interest rates and lower loan-loss provisions—fewer than half of Europe’s banks would reach healthy profitability levels, absent “deep-rooted” structural reforms.
That’s not to say everything is peachy-keen for Wall Street. In 2015, only 47 percent of American banks met the IMF’s bar for “healthy” profitability, meaning a return on equity of 10 percent or more. That’s a target some of the biggest U.S. lenders have had trouble hitting with Goldman Sachs, Bank of America and Citigroup all falling shy in recent quarters. Compare that to an average U.S. return on equity of 12.3 percent during the glory days of 2006-2007.
The market is somewhat to blame. Rock-bottom interest rates are keeping a tight lid on interest income. But even worse for profits is that trading fees remain depressed. As a percentage of assets, trading income is hovering at just over 1.5 percent, compared to nearly double that in 2006.
Then there are the regulatory pressures. The costs of stricter capital requirements and disaster preparedness plans have been a double-whammy for bank profitability. Just this week, JPMorgan and four others resubmitted their living wills to federal regulators for approval six months after having their plans deemed unworthy by the Federal Reserve and Federal Deposit Insurance Corporation.
European banks haven’t suffered quite so much in the regulatory department as their American peers (other than at the hands of the DOJ). But that could be set to change, with stern warnings from the IMF echoing challenges from the European Central Bank, which has been beefing with lenders over whether to blame industry woes on negative rates or bad management.
The IMF spared American banks of any of those recommendations. And for that, at the very least, Wall Street can be happy. In a low-rate world, you take what you can get.