Voodoo Banking Part 4

Banks have issued high cost equity to re-capitalise their balance sheets. Hybrid capital issues paying between 7.00% and 11.00 % pa will be drag on future earnings. Highly dilutionary equity issues (often at a discount to a share price that had fallen significantly) will impede earnings per share growth and return on capital.

Banks also face additional short-term costs. Litigation against banks has increased. There may also be prosecutions of banks. The costs of these are unknown. In the longer term, banks face higher regulatory and compliance costs.

As banks begin to adjust their business models (selling assets and reducing staff), significant restructuring costs will affect earnings in the short run. The benefits of the restructuring will yield benefits but they will take time to emerge.