It is widely accepted that US banks began the post-crisis healing process sooner, on average, than their European and UK counterparts, although both suffered severe declines during the 2009/10 period. While US bank ROE levels reset 5% lower post crisis to the 10% per annum level, European bank ROE levels have suffered, failing to reach on average 7.5% p.a. in the eight years since the crisis1. The market has appreciated this divergence too, with US bank shares moving towards levels seen pre-crisis, while European bank valuation remains stuck in their post crisis rut2.
Back in June, the US Federal Reserve announced plans to green light stock buy back and enhanced dividend plans for some 30 banks in recognition of capital, liquidity and risk governance progress made to date. Since then, US bank stocks have performed well, with the Dow Jones Bank Index moving higher from a value of 417 to eclipsing 500 last week. Where does this leave banks on this side of the pond? European banks represented in the STOXX EURO 600 have remained unchanged for the same 9- month period, resting a value of 180 (to be fair this index did rise to close to 200 earlier this year before retreating).
Well, perhaps leadership will come from UK banks first with growing dividend and back-back levels? A handful of US banks have even been ploughing up to 100% of annual earnings into the pockets of shareholders for sometime. Notwithstanding the headwinds of Brexit, some UK banks appear to be joining the track followed by the US banks earlier. First, litigation risks relating to misconduct appear to be at an inflection point, with Barclay's recent performance buoyed by lower litigation costs and RBS's litigation costs apparently fully priced in3. In fact, this lender recently slashed its litigation costs by 75%4.
Well, while spring is not (yet) in the air in the City (but snow is), the talk of share buybacks and dividends is on the CEO agenda. On February 20th following a 25% profit jump and finally putting the PPI episode in the rear view mirror, Lloyds announced a £1 billion share buyback, which when combined with a dividend hike of 20% essentially means a £3 billion windfall for shareholders. RBS has accounted its first profit in TEN years while HSBC's new CEO may play it safe with flat capital return policies, notwithstanding sporting a 14.5% CT1, indicating future results may clarify dividend policy further (to be fair HSBC's dividend rate is already very healthy and approaching US bank levels). Barclays is also appears positioned to increase (read double) dividends and return capital to shareholders in the near term, including a buy-back. StanChart, not really a UK bank at all but based in the UK, announced yesterday a material reduction in RWAs in liquidation, a reduction in loan impairments by half, achieving a 3.5% ROE and a restoration of final dividends. This can only mean good things for CEO Bill Winters who has worked hard to restore asset quality, governance and the bank's reputation.
Another reason for cheer for UK banks relates to interest rates which is on the rise in the UK, allowing prompt asset repricing while passing on such increases at a slower pace to their depositors, thus supporting lagging NIMs.
If this hypothesis is right, UK banks may indeed be at the beginning of an inflection point, soon to join their US and Nordic competitors in improved shareholder returns, thus leaving European firms to the final act some 10 years after the crisis.
1 Source, St Louis Fed Reports and World Bank
2 MSCI US Banks Index GICS Level 2
3 See http://www.iii.co.uk/articles/470978/uk-banks%3A-review-and-whats-store-2018 and https://www.bloomberg.com/graphics/2017-european-bank-litigation/
4 See https://www.thelawyer.com/rbs-slashes-litigation-costs/
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