If you want to join a bank that’s a) unlikely to experience a cataclysmic reduction in its share price and b) unlikely to be forced into making a big strategy shift to increase its return on equity (RoE) and keep its shareholders happy, then Morgan Stanley’s banking analysts have just the chart for you.
Taken from a note covering this week’s not-so-good Credit Suisse results, the chart (below) plots banks’ expected overall returns on tangible equity in 2018 against their current market value as a proportion of their current tangible equity.
Banks that achieve a strong RoE in 2018 will keep their shareholders happy and therefore shouldn’t have to make big strategy changes (read redundancies, the closure of entire business areas, the withdrawal from entire regions.) However, banks whose RoE is expected to be weak in 2018 could be in for a turbulent time.
Equally, banks whose share prices are significantly higher than their tangible equity – and above the trend line in the chart below – are most likely to suffer a ‘correction.’ This is not good news if your bonuses are heavily tied up in that banks’ stock.
The implication? Avoid Standard Chartered, Nomura, Barclays and RBS. Go for J.P. Morgan and Goldman Sachs – Macquarie if you’re feeling bold.