By Shahien Nasiripour in New York
Large US regional banks will need to cut expenses by up to 40 per cent to cope with slower economic growth, increasing pressure to cut staff or merge with rivals, a study warns.
The report by Alvarez & Marsal, the turnaround specialists, said returns on equity at leading regional US lenders had fallen by about half from pre-crisis levels of about 15 per cent.
Luring investors back to the sector would require more than routine cost-cutting, it said.
Seamus McMahon, a senior adviser at Alvarez & Marsal, said: ?There is no way to take 30 to 40 per cent of costs out of an existing business system.?
Mr McMahon said the resulting merger and acquisition activity would see the number of US banks shrink from 7,500 to 4,000-5,000 in the next 10 years. Only about half the top 50 banks by assets in the US, most of them big regional lenders, would survive, he said.
Joseph Berardino, Alvarez & Marsal managing director, said: ?There is simply too much capacity chasing too little demand?.
Lenders face multiple challenges if they are to increase profits. Low interest rates are squeezing their net interest margins. A faltering economic recovery is reducing the demand for loans. Higher capital requirements and restrictions on products are eating into earnings.
As the cost of equity has risen and returns have fallen, shareholders are taking an increasingly dim view of bank stocks. KBW?s indices that track large-cap banks and regional lenders are trading below book value, reflecting concerns.
By 2013 just three of 25 large regional banks will deliver a return on equity higher than the cost of their equity, according to Alvarez & Marsal?s analysis. Only seven of the 25 are now trading above book value.
Companies such as Regions Financial – which is trading at about a third of its book value – and SunTrust Banks – trading at about half its book value – will be among those facing pressure either to pare back their operations significantly or merge with competitors. Many already have announced cost-cutting measures to placate investors.
From 2002 to 2006, banks? ROE was about twice as high as their cost of equity capital, according to Alvarez & Marsal. Since 2008, the cost has exceeded the return, a trend that is forecast to continue until 2013.
Kevin Fitzsimmons, who covers regional banks for Sandler O?Neill, said: ?Cost is a focus because it?s one of the few levers under manage-ment?s control.?
? The Financial Times Limited 2011