Wall Street banks look set to report better efficiency ratios in the second half of the year, a key metric that deteriorated as global economic gloom sapped income from traditional profit centers and costs surged amid a battle for talent, analysts say.
A closely watched measure of performance, the ratio helps analysts gauge how much the company spends for outside interest payments to generate a dollar in revenue. A higher ratio implies that the bank is using capital less effectively.
"Our current projections assume a modest improvement in the banking industry’s efficiency ratio from just under 58% in 2021 to just under 57% in 2022," said Christopher McGratty, Head of U.S. Bank Research at KBW, a Stifel company.
The expectation of a marginal recovery in the profit metric foreshadows an uptick in overall revenue growth.
Even though capital markets activity has slowed dramatically, net interest income growth is accelerating, McGratty said, adding that overall revenue growth should exceed expense growth.
For the first six months, the efficiency ratio of JPMorgan (JPM.N) leapt to 60% while Citigroup's (C.N) jumped to 66%, both highest since 2014, according to earnings presentations. Analysts widely consider a range between 50% and 60% as optimal for banks, and see rising efficiency ratios as a negative sign.
