Nine Global Banking Giants Face Challenges to Profitability, IMF Says

The safety of global systemically important banks (GSIBs) has improved significantly since the Great Recession, according to the latest Global Financial Stability Report from the International Monetary Fund (IMF), issued earlier this week. However, roughly a third of them, representing about $17 trillion in asset size, could struggle to achieve sustainable profitability, underscoring ongoing challenges and medium-term vulnerabilities.

The IMFs profitability threshold was 8 percent cost of equity. There were nine systemically significantly institutions identified whose 2019 profitability was projected to fall below that level, including one US bank (Citigroup). It was followed by a handful of European entities (Société Générale, UniCredit Group, Deutsche Bank, Barclays, and Standard Chartered), and a few Japanese institutions (Sumitomo Mitsui Financial Group, Mizuho Financial Group, and Mitsubishi UFJ Financial Group).

For these banks, profitability has been restrained by structural forces such as high operating costs, low operating efficiency, and highly competitive home markets, exacerbated in several cases by weak information technology systems, the report said. Banks that exhibit both thin capital buffers relative to future regulatory requirements and relatively weak profitability to build those buffers over the next few years warrant heightened attention. Some of these institutions are still dealing with legacy issues from the financial crisis, while others, especially the European investment banks, continue to contend with the fundamental issue of defining and executing profitable business models.

An environment of low domestic interest rates also affects the profitability of Japanese GSIBs, according to the IMF. These banks want to continue to expand internationally to counter compressed domestic profitability, and banking regulators were urged to keep in mind that such expansion increases currency and maturity mismatch risks. Problems in even a single GSIB could generate systemic stress, so supervisory action clearly needs to remain focused on business model risks and sustainable profitability, the report said.

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