Banks: A Tale of Necessary Transformation

Investors have maintained a rather negative view of the banking sector; banks hold equity valuations now above book value, but only slightly. Prior to the recession, the price-to-book ratio of banks in developed countries was circling around 2, but since then banks have had average price-to-book ratios of less than one. Additionally, banks in developing countries are under performing due to the issues with nonperforming loans, with over 9% of loans considered nonperforming in countries such as India. Turkey’s issues with the Lira are creating additional concerns about the default rise climbing due to depreciation.

Meanwhile, investors have seen a trend in the performance of banks: sharp cuts in operational costs managed alongside enhancements in risk-management and compliance staff. Given those two ideas, it appears perhaps unsurprising that US banks have made more drastic cuts than European ones. Concerns exist, nonetheless, that banks head towards a commoditized, low-margin future. 2012 to 2017 saw an industry-wide annual global revenue growth that averaged around 2.4%, a fraction of the 12.3% in the years before the crisis. Regardless of these factors, recent research estimates that as interest rates are hiking upwards that the banking industry return on equity could reach 9.3 percent in 2025.

Keith Knutsson of Integrale Advisors commented, “If consumers become more comfortable with tech companies disrupting the financial services industry and are not willing to adjust to the volatile market place, it isn’t far-fetched to see the major banks of today crumble to the expectations of investors. Major players have the resources to utilize technological developments more than any other.”