A recent report from EY focuses on key themes from the second quarter earnings calls of global financial institutions. The report, titled “Global banking and capital markets sector — Key themes from 2Q14 earnings calls: August 2014″, breaks down the 2Q earnings calls of 32 global banking firms to identify 10 key themes that all or almost all touched on during the call.

Banking Sector earnings season

Theme 1: Quarterly earnings performance — ROE performance hurt by legacy issues

Banking Sector ROE

The EY report highlights that banks’ returns on equity still reflect a drag from legacy issues. In the second quarter of 2014, only six banks produced ROEs above 12%. All of these banks are headquartered in the Americas and have a retail banking focus. Another seven banks reported ROEs within range of the typical 10%-12% cost of equity, but still well off historical levels. Management at several banks pointed to stronger ROEs in their strategic businesses and some implied they believe sustainable returns are possible when non-core units are finally resolved.

banking sector expenses

Theme 2: Expense trends— no new cost targets announced

Efficiency savings are being reinvested in the business at most banks. Of note, just 10 of the banks reported a year-over-year decline in expenses. Furthermore, expense growth was greater than revenue growth at 18 of the banks. Management in most cases blamed the higher expenses on legal-related provisions, regulatory compliance and restructuring costs.

The global banking sector remains focused on creating efficiencies through exercising discipline on business-as-usual costs and carrying through on already announced cost-reduction programs.

Theme 3: Capital strength and plans — banks exceed requirements for CET1 ratios

Banking Sector Leverage ratios

Virtually all of the banks continue to gather capital. As of the end of the second quarter, banks in all regions reported Common Equity Tier 1 (CET1) ratios above minimum requirements. Most banks plan to maintain an  capital internal cushions to deal with changing country-specific requirements. Banks have demonstrated an ability to build capital even while absorbing significant legal fines and provisions, but the sector continues to face major uncertainties regarding leverage ratios, qualifying capital instruments and buffers for national and global systemically important banks.

Banking Sector Basel III

Theme 4: Regulation—uncertainty continues as banking sector awaits final rules

Finalization of post-crisis rules is ongoing. Six years after the global financial crisis sparked a wave of unprecedented regulatory reform for the global banking sector, many rules have yet to be finalized. While the broad regulatory framework that emerged from the Basel III comprehensive reform package and national and regional legislation is well known, the interpretation of many rules remains a work-in-progress. During the 2Q14 earnings season, management at banks across regions commented on the lingering uncertainties related to leverage ratios, liquidity coverage ratios, bail-in requirements and a range of other issues.

Banking Sector Net income

Theme 5: Acquisitions and divestments—meaningful progress on reducing non-core assets

The EY report also noted that the banks focused on sales of loan portfolios and non-core assets during their 2Q ccs. There was little discussions regarding acquisition strategies, as only a few well-capitalized banks were even willing to consider bolt-on deals, and only deals that could live up to stringent internal price and return metrics.

Asset sales were a completely different story. Management of the banks mentioned a number of deals regarding disposal of non-core assets, loan portfolios and non-strategic businesses. The environment for asset sales has been relatively strong in 1H 2014, and that seems to have led to more disposal deals for several of the banks.

Banking Sector Impaired loans