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Kroll: Major US banks sporting strong capital ratios amid weak profits

Kroll BondRating Agency said Sept. 28 that while U.S. banks are sporting significantlystronger capital ratios, especially compared to their pre-financial crisislevels, many are suffering from weak profitability at the same time. As a result,many banks are still earning less than their cost of capital.

The ratingagency attributed the phenomenon to more stringent regulatory requirements,which can sometimes be both "onerous" and necessary. The low interestrate environment imposed by the Federal Reserve and other central banks alsocontributes to the issue, Kroll added.

Kroll alsonoted that the overall risk profiles of U.S. universal banks are stillamplified, due to these institutions' sizeable capital market operations,inherently unpredictable and riskier business, and a significant dependence onwholesale funding sources. Furthermore, compared to their pre-crisis liquiditylevels, U.S. universal banks today are keeping larger levels of liquid assets,which has been largely prompted by the desire to exceed Basel III requirements.Universal banks are also cutting down significantly on their reliance onshort-term unsecured funding and are slashing, if not completely removing,off-balance sheet funding vehicles.

The ratingagency suggested that banks continue to cut back on capital-intensive tradingactivities, especially when the associated returns cannot offset the capitaland other regulatory costs. Companies can also focus more on customer andproduct profitability rather than league table rankings, and keep shiftingderivative exposures to exchanges from over-the-counter transactions. Inaddition, Kroll put forward wealth/asset management as relatively stable andless capital-intensive business that can be a source for more substantialcontributions.