Bank Cost-Cutting 'Has To Go A Lot Further'

Banks must make deeper and more sweeping cost reductions if they want to restore profitability levels that are acceptable to investors, McKinsey & Co. said in an annual review of the industry.

'It has to go a lot further', Toos Daruvala, a director in the consulting firm’s North American banking practice and a co-author of the report, said earlier this week in a phone interview. 'Banks have done quite a lot on cost-cutting but frankly the environment has deteriorated over the last year' because of economic weakness, he said.

Bloomberg reports that banks globally are failing to produce return on equity -- a measure of how well they reinvest shareholder money -- that meets investors’ requirements, McKinsey said in the report. Higher capital requirements imposed by regulators, low interest rates that reduce how much banks earn on loans, slow economic growth and new rules that eliminate or reduce some fee income have hurt results, Daruvala said.

'Banks are sort of running to keep in place', Daruvala said. 'We’re still two to five years out from creating a more normalized return environment'.

Global banking return on equity, or ROE, fell to 7.6% in 2011 from 8.4% a year earlier, 'well below' the 10% to 12% average cost of equity, McKinsey said in the report titled The Triple Transformation: Achieving a Sustainable Business Model. U.S. banks earned an average ROE of 7 percent last year and European lenders earned zero -- or 5 percent when excluding the most indebted nations such as Spain and Greece, according to the report.

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