Frontpage News 2016 Bank results lag b...

Bank results lag behind other companies

4 May 2016

A review of annual reports from 2015 shows that banks’ overall return on equity lags behind other companies.

A review of annual reports from 2015 of the largest and medium-sized publicly traded companies in Denmark in a new analysis from the Danish Bankers Association shows that the banks’ return on equity is still lower than the weighted average measured for all other companies.

 
“Our review shows that the weighted average of the banks’ return on equity after tax was around 9 pct. in 2015. The average was approx. 14 pct. for non-financial companies. We can, therefore, note that banks are still behind in relation to generating a return on invested capital, in comparison with other types of companies,” says the Chief Economist at the Danish Bankers Association, Niels Storm Stenbæk.
 
With a simple average, the banks’ return on equity is still approx. 9 pct., while non-financial companies fall to 7 pct. The explanation for this difference is that the largest companies in 2015 were generally better at generating return on equity and individual smaller players bolted off into a negative direction.
 
“It must be kept in mind that the largest players also have the largest effect on the Danish economy and therefore, it is particularly relevant to look at the weighted average,” Niels Storm Stenbæk explains.
 
He also highlights that if we, for example, remove the pharmaceutical company, Veloxis, from the analyse (it had a return on equity of minus 196 pct. in 2015, but an estimated 0.02 pct. of aggregate turnover of the largest and medium-sized publicly traded companies), then the simple average is 12 pct. on average for return on equity for non-financial companies.
 
Therefore, the figures reinforce the fact that the recurrent focus on bank revenue deserves more variation, amongst other things by comparing across branches. By looking at profits in relation to the capital that investors tie up in the company, the result is a lot less flamboyant in comparison with the rest of the business community.
 
Figure 1: return on equity in the largest publicly traded companies in Denmark


Source: Annual reports from 2015 and calculations by the Danish Bankers Association
Note: Large and midcap companies. Additional financial companies are omitted from this figure, just as Veloxis Pharmaceuticals, as a marked outlier, is omitted from non-financial companies. Calculated as the annual result after tax divided by equity at the end of the accounting period. Weighted by turnover.
 

The reason that banks are not ranked better in terms of return on equity is because the sector is being challenged by an economy that is not really being kicked into gear. In addition, there is a smaller difference between lending and deposit rates (interest margin) and a decrease in lending and high surplus of deposits as a result of weak demand for loans which means that the banks must place larger funds at Danmarks Nationalbank at a negative interest rate.
 
In addition to the low interest rates that seem to continue for a longer period, revenue in the sector could also be put under pressure by new regulations, particularly if the new Basel IV rules affect the Danish financial sector negatively.
 
“The banks are in the engine room of the Danish economy. But a prerequisite for this to function is that the banks can generate a return on their equity. This is, moreover, a requirement from authorities, credit rating agencies and investors. If banks cannot attract new capital either via capital markets or via revenue, banks cannot support sustainable growth in Danish society, for example in the form of new lending,” the CEO of the Danish Bankers Association, Ulrik Nødgaard emphasises.
 
Further information:
Communications Director at the Danish Bankers Association, Nina Munch-Perrin
Tel: +45 3016 1006
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