While more and more banks are able to stick their foot in the door and raise capital post recession, increased regulatory pressures have forced them to ratchet up capital requirements, posing a return-on-equity challenge to the industry.
“I think as we lower leverage in the industry, I think that we are going to see lower returns because of that lower leverage,” said Christopher Marinac of FIG Partners LLC. “And of course, it is going to be up to the banks to try and figure out a way to move the needle else wise.”
These capital needs are holding ROE at historic lows, which, according to Marinac, may be here to stay unless banks get creative and start changing how they bring in earnings. He provides several solutions, one being improved margins.
“I’m very optimistic that margin can get better, but I’m cautious because we have a very competitive industry,” he said. “We have very smart customers, both business and consumers, as much as I think credit risk spread should widen. We as an industry should be charging more for it, and we should be paying more for it as consumers and customers.
A company that has been able to make money and grow book value is Hancock Holding (HBHC), says Marinac. Turning to bigger banks as leaders in efficiency, he cites expense cutting as another way to increase profitability.
“You know, we as an industry, particularly as you look at the mid-cap and small-cap banks, are not very efficient. We need to be more like U.S. Bank (USB) or BB&T (BBT), and there are a whole host of others who are efficient,” he said. “I think the more banks either get together and get serious about them doing expense cuts, I think that’s going to make a big difference for this industry. So I do think that as much as I’m probably cautious on ROE, I do think there are ways to get better at it.”
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