UK
Back in 2007, a return on equity of 20% plus was all the rage. At Goldman, the return on equity in 2006 was a staggering 32.8%.
High returns on equity helped fuel high pay. After all, if a business was generating big returns for shareholders, shouldn’t its employees be paid accordingly?
These days, returns on equity are considerably lower. Bernstein Research, for example, is predicting a ROE for Goldman of 10.8% for 2009 and 9.8% for 2010.
Despite this, banks continue to quest after the returns of the recent past. BNP Paribas is rumoured to have tied last year’s bonuses to the achievement of 20% ROE in years to come.
And Jamie Dimon says returns of 20% will again be a possibility in future as market share increases.
Is a 20% ROE wishful thinking? Or is the market about to polarize into those that can do it (and can pay accordingly) and those that can’t?
Any bank that thinks it can pull a 20% roe in this market is highly, highly delusional.
At the moment, it is very difficult even with under-valued stocks, still there is something that is missing ‘The trust’ that will take the hand of these stocks around at least their fair value.
A basic bit of economics is that it is entirely possible to get a 20% return, in there, or any other market conditions.
…if you are prepared to bear the risks.
What has happened is that the risk necessary to get a given *average* return has gone up big time. Easy low risk 20% ROEs are gone. Hard, high risk ROEs or 20% are plentiful. The current mess has created lots of grossly underpriced assets. If you work out which is underpriced and which is just toxic you will get very rich indeed. Or broke. You choose.
Most of the banks would find a product or a trade that would make 200 bps or what ever then leverage that up 60 times !
They can’t and wont be able to do that for the foreseeable future.
They’ll have to generate alpha the good old fashioned way !