European banks have pushed back profitability targets so many times, the dates are now more placeholders than deadlines.
Eight years after the financial crisis hit its peak, several of the region’s lenders said they’ll probably need more time to reach the return on equity goals they set for the next few years. Royal Bank of Scotland Group on Friday became the latest to do so, blaming the impact of lower-for-longer interest rates and depressed customer activity after the UK’s vote to leave the European Union. The state-owned firm joined HSBC Holdings, Standard Chartered and UBS Group, who all also watered down their return guidance when presenting second-quarter results.
“There are a multitude of reasons they’re cutting their forecasts, but there has definitely been a general squeeze,” said Alan Beaney, a director at RC Brown Investment Management, which owns UK and European bank shares including RBS and HSBC. “Brexit is another excuse to step back from targets.”
The commentary has been almost uniform across the industry and is bad news for a sector that’s already seen dramatic share-price declines. The European Stoxx 600 Banks Index has fallen 32% this year and the 30 firms it tracks trade on average at half their book value, the accounting estimate of their current worth.
Brexit has introduced more potential costs and economic uncertainty for banks that have already cut thousands of staff to trim costs. With the UK economy edging toward a recession, the Bank of England on Thursday cut its benchmark rate for the first time since 2009, while the European Central Bank’s deposit rate has been negative for more than two years.
The latest round of target adjustments is far from the first. Last year, HSBC lowered its RoE goal to a minimum of 10%, from a bogey of 12% to 15%. Deutsche Bank in April 2015 said it was targeting a return of tangible equity of 10% by 2020, a lower level and later date than its previous goal of 12% ROE by 2016.
Brexit “has created considerable uncertainty in our core market,” RBS said in its second-quarter results statement. “In the current low rate and low growth environment, achieving our longer term cost-income ratio and return targets by 2019 is likely to be more challenging.”
RBS reported a negative 11% return on tangible equity in the second-quarter, well short of the more than 12% it aims to generate. The bank, which is still 72% owned by the government, made a second-quarter net loss of £1.08bn ($1.42bn) after taking £1.28bn of conduct and litigation charges. RBS’s cost-income ratio was 117% compared with a target of less than 50% in 2019.
UBS said last week it will no longer provide short-term expectations for profitability because there is “very little visibility” on earnings under “current market conditions and continued macroeconomic and regulatory uncertainty.” The bank maintained its return goal of more than 15%, but no longer provides a time frame, saying instead that it expects to hit them in a “normalised” environment.
On Wednesday, HSBC abandoned a target of surpassing a 10% return on equity by the end of next year, citing economic and political uncertainties. Earnings at Europe’s largest bank fell 45% from a year earlier. That was before Mark Carney’s BoE rate cut on Thursday, which HSBC said will probably trim another $100mn from its income for the rest of this year.
Barclays had already softened its financial guidance in March, cutting its return on equity target to “double-digit” in the “medium term” from 11% by the end of this year.
Societe Generale Deputy CEO Severin Cabannes on Wednesday reiterated that his bank may no longer be able to reach a return on equity of 10% this year considering “very high” risks and uncertainties. The Paris-based lender could achieve its profitability target “in a normalised environment,” he said in a Bloomberg Television interview.
By contrast, French rival BNP Paribas stood by its 2016 targets and Credit Agricole maintained its profitability goal for 2019.
Asia-focused Standard Chartered said lower growth rates in Hong Kong and Singapore, added to uncertainty caused by Brexit, meant it reaching its profitability goal was “likely to take longer than we had hoped.” The firm had been targeting an 8% return on equity by 2018, rising to a 10% return by 2020. That compares with a 2.1% return in the first six months of the year. “To get to a very exciting return, we’ll have to get out of this very uncertain regulatory and economic environment,” CEO Bill Winters said Wednesday. “We are still miles away from what we think is the value that our bank represents.”