British banks creep back toward sustainable profitability this year

Tim Wallace
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Rising capital costs and a tide of regulation have depressed banks’ profitability since the crash
BANKS’ returns could start to exceed their cost of equity this year, analysts at EY said today.

The study predicts returns on equity (ROE) will rise to an average of 9.5 per cent in 2015, exceeding the 9.1 per cent cost of equity.

In the years before the financial crisis, UK banks regularly made double digit returns on equity.

But they dived from 17.6 per cent in 2007 to 1.1 per cent in 2013 and 5.75 per cent in 2014.

At last, EY now believes they could be track to rise to double digits in the near future, as banks have strengthened their balance sheets and the economy is growing.

“Achieving ever greater ROE requires more than just an improving economic environment,” said EY’s Stephen Lewis.

“It is a balancing act, which has been difficult to get right given increased capital requirements, a higher cost of capital, more liquidity and an increase in the cost of compliance. But it appears we are finally getting back on track to achieving sustainable growth.”