By Josh Zumbrun
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (October 12, 2017).
The International Monetary Fund said some of the world's largest
financial institutions -- including Deutsche Bank AG, Citigroup
Inc., Barclays PLC and a few Japanese institutions -- could
struggle in coming years to remain sufficiently profitable.
"About a third of banks by assets may struggle to achieve
sustainable profitability, underscoring ongoing challenges and
medium-term vulnerabilities," the IMF said, referring to the
world's most important financial institutions.
The IMF's critique of the banks came in its biannual Global
Financial Stability Report, released Wednesday as finance ministers
and central bankers from 189 countries gather in Washington for the
annual meetings of the IMF and the World Bank.
It is unusual for a body like the IMF to identify banks by name.
The report named nine financial institutions in all, Besides
Citigroup, Deutsche and Barclays, it also named Société Générale,
Italy's UniCredit S.p.A., the U.K.'s Standard Chartered PLC and
Japan's Sumitomo Mitsui Financial Group, Mizuho Financial Group and
Mitsubishi UFJ Financial Group as likely to deliver subpar
profits.
All nine declined to comment on the report.
"Institutions that are not profitable might not be able to
generate enough capital in the future should adverse shocks hit,"
Tobias Adrian, director of the IMF's monetary and capital markets
department, told reporters. "It might become a financial stability
risk not to be profitable."
The IMF said the consensus among private-sector bank-industry
analysts was for a return on equity of less than 8% for each of
those nine banks in 2019. In previous research, the IMF has said
that banks' cost of equity -- that is the return stock investors
expect on their holdings -- is at least 8%. Banks need to earn
above this threshold to remain consistently profitable and
otherwise may face difficulty building capital for a rainy day, the
IMF said.
Regulators and international policy makers are typically
circumspect about questioning the profitability of specific banks,
often preferring to speak more generally out of concern they could
weaken institutions that are already vulnerable and risk
destabilizing the global financial system. But the global economy
is in a broad upswing, and financial markets have been broadly
supportive, creating a window for the IMF to speak more boldly.
The report looked at the 30 international banks the Financial
Stability Board, the international regulatory body, has deemed to
be global systemically important banks, based on their size and
complexity and potential ability to wreak havoc across the global
financial system should they stumble. All told, the 30 institutions
hold more than $47 trillion in assets, a sum representing more than
one-third of global banking loans and assets.
Some of the IMF's views are already conventional thinking on
Wall Street. Deutsche Bank's stock, for example, trades at less
than half of its book value, or net worth, and has traded well
below this level since 2010. This suggests investors don't believe
it will deliver returns that create value in the long run.
Deutsche Bank has struggled to maintain profits during a
prolonged turnaround hobbled by high legal fees and technology
costs and capital constraints on dominant businesses such as
fixed-income trading. Another challenge for the German lender is
that retail banking in its home market is less profitable than that
business is for many big banks elsewhere. Deutsche Bank raised $8.5
billion earlier this year by selling shares, putting pressure on
executives to prove they can use the fresh capital to boost
profits.
Citigroup investors have grown more confident in the bank's
outlook. Over the past year, the shares have risen more than 50%,
almost three times the gains of the broader market. The stock also
is trading near its book value, or net worth; it last hit that
level in September 2008. And in June, the U.S. Federal Reserve gave
Citigroup a green light to return nearly $19 billion in capital to
investors through higher dividend payouts and increased share
buybacks.
The British banks named in the report, Barclays and Standard
Chartered, have been shedding asset and business lines to become
more profitable. Italian UniCredit, over the past year, took a
number of actions to shore up its finances and improve its
profitability, including raising EUR13 billion in fresh equity,
selling a multibillion portfolio of bad loans and cutting
costs.
Despite the handful of projected laggards, the IMF report said
that overall, the largest global banking institutions have become
"more resilient since the crisis with stronger capital and
liquidity." Collectively, the largest banks have higher capital
ratios, more liquidity and fewer assets than at the beginning of
the decade.
The report cited progress at U.S. banks in particular that
raised capital and unloaded noncore businesses. The other seven
U.S. banks that are considered systemically important -- State
Street Corp., Wells Fargo & Co., J.P. Morgan Chase & Co.,
Goldman Sachs Group Inc., Morgan Stanley, Bank of New York Mellon
and Bank of America Corp. -- were expected to be comfortably
profitable through 2019. By 2019, just 29% of assets in the
systemically important financial institutions are expected to be in
laggard banks, down from 39% over the 2012-16 period and 51% from
2008 to 2011.
Yet "problems in even a single" one of such institutions "could
generate systemic stress," the IMF said.
While the IMF isn't a bank regulator, its report represents an
effort from the institution to apply pressure to national
regulators and the financial institutions themselves to continue
taking steps to ensure the safety of the global financial
system.
The IMF said regulators should press their financial
institutions to resolve nonperforming loans, drop unprofitable
lines of business and develop plans to unwind the bank in case of
failure.
For many market observers, the financial crisis of 2007 to 2009,
in which Bear Stearns, Lehman Brothers and American International
Group nearly brought down the global financial system, looms
large.
The report said Japanese banks were particularly struggling to
earn high returns due to low interest rates. Mizuho and Mitsubishi,
for example, reported lower net profit in the year ended March
2017.
Problem banks have either been slow to deal with bad loans from
the financial crisis or, as in the case of some European investment
banks, had undefined and unprofitable business models, the report
said.
"Without a more concerted effort to reduce nonperforming assets
and improve business models, financial stability concerns could be
reignited in the euro area," the IMF said.
Jenny Strasburg, Margot Patrick, Giovanni Legorano and Kosaku
Narioka contributed to this article
Write to Josh Zumbrun at Josh.Zumbrun@wsj.com
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October 12, 2017 02:47 ET (06:47 GMT)
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