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December 7, 2012 12:00 am
Banks are likely to remain “uninvestable” unless they can charge more for loans, and unless regulators speed up the introduction of new rules, the UK’s biggest investors have warned.
The Association of British Insurers, representing 350 insurers and fund managers, said that the environment of weak profits and an uncertain regulatory framework had to be stabilised, or investors would continue to avoid the sector.
“It would be pretty difficult for banks to raise any equity in the current environment,” Robert Hingley, the ABI’s director of investment, told the Financial Times. The analysis, supported by a 38-page report on the “investability of banks” published on Friday, follows pressure last week from the Bank of England’s Financial Policy Committee for banks to bolster capital levels further.
Mr Hingley highlighted anaemic profitability as the key problem area, arguing that banks must increase the margins they charge customers.
“The cost of borrowing needs to rise,” he said, adding that underlying profitability, judged on the basis of return on assets, needed to double from the current average of 0.25 per cent.
The ABI stressed that investors were no longer intent on banks generating high levels of return on equity with over-leveraged balance sheets, as was the norm in the period running up to the start of the crisis in 2007. “An attempt to maximise ROE, particularly in the short term, can create excessive risk taking,” the report says.
The ABI’s secondary focus is on what Mr Hingley called the “high degree of investor frustration” over regulatory uncertainty. That is acute in the UK, where the government is midway through drafting legislation to enact the Vickers Commission reforms, including its central recommendation of ringfencing retail banking activities from more risky investment banking.
It is unclear whether rival EU-wide structural reforms proposed by the Liikanen review – which suggested a different ringfence, around the trading part of investment banking operations – will be implemented in law.
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