This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration. Need a new registration confirmation email? Click here
NEW YORK (
TheStreet) -- "Credit quality is a gift that keeps giving because stable and good credit quality allows management to focus on optimizing returns."
This is Oppenheimer analyst Chris Kotowski's assessment of the opportunity and necessity for banks at this point in the credit cycle. Despite the "headwind" from the prolonged period of historically low interest rates, the analyst's view for the big banks has been that "over time banks will manage themselves to earn a competitive return. It is simply not an option for them to accept a single-digit return when the rest of the market is earning, say, 14%. That is an unstable dynamic that would cause capital to leach out of the banking system."
The "three levers" that banks can pull to bring their returns in line with the broad market, according to Kotowski, include pricing, "expenses and scope of the delivery system," and capital deployment.
The analyst also emphasized that the banking industry is cyclical, and said that "we will never argue that the industry 'learned its lessons,' but on the other hand we are on the favorable side of the cycle where the managements have emerged from the fog of war and can now focus on the logistics of running a well-oiled machine."
Of course, investors are probably way too cynical to expect corporate executives to learn any lessons for the very long haul, with so much of their compensation still tied to relatively short-term results, however the investors themselves might have learned a key lesson, which is simply to avoid bank stocks whenever the U.S. economy shows clear signs of heading into a recession.
Fourth-quarter earnings results underlined the themes of cutting expenses and deploying capital. "
Goldman Sachs (GS - Get Report), which through the first nine months had shown [a return on tangible common equity, or] ROTCE of just 9%, sharply [dropped] its full-year compensation ratio from 42% to 38% to bring the full-year ROTCE in at 11%," Kotowski said, adding that the company "has now kept its aggregate dollar amount of TCE flat at about $63B+/- for two and a half years and used any earnings above this level to repurchase shares."