US Banks: Better To Avoid The Industry Because RoE Does Not Compensate For The Risk

US banks trading income declines

Covid-19 cuts the US lenders’ profits by less than half. The US banking balance sheet is solid (liquidity and solvency) and valuation multiples are at record lows. However, Bankinter analysts recommend avoiding the sector as the RoE does not compensate for the risk.

Furthermore, analysts highlight the following: the increase in the cost of risk reduces the sector’s profitability (RoTE) by less than half (~6.7% in Q1’20 vs. 16.6% in Q1’19); the banks’ guidance anticipates a complicated environment-macro deterioration, upside risks and low rates – in 2020 and part of 2021 and after stock buybacks are suspended- a catalyst for past share prices – the likelihood of seeing dividend payment cuts also increases.

Net Attributable Profit

The banks’ balance sheets are solid – the average CET1 capital ratio exceeds 11.2% – and liquidity is high (+15.6% in deposits). But Covid-19 boosts provisions and reduces profitability (RoTE) to less than half (~6.7% in 1Q20). The figures for Q1’20 do not yet reflect the increase in non-performing loans. The lenders are anticipating this, however, with provisions and impairments similar to those made in the 2008 financial crisis. The companies’ guidance reflects a complicated macro environment with a sharp drop in activity in Q2’20 (-30%/-40%) and new provisions which have a severe impact in 2020 and part of 2021 (H1’21?).

Q1’20 Results

The figures surprise negatively with double digit falls in NAPs ranging from 30.1% (Morgan Stanley) to 88.9% (Wells Fargo). The common denominator is a significant increase in trading revenues (bonds, above all), a bad performance in Investment Banking.

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The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.