Large banks will need an extra $221 billion worth of capital and may see their profits decline by $110 billion if all of the proposed industry reforms are brought into effect, hitting nationalized banks such as Lloyds Banking Group (LON: LLOY) and Royal Bank of Scotland (LON: RBS) the worst, warned JP Morgan (NYSE: JPM) analysts on Wednesday.
JP Morgan’s team of analysts predicts that if all reform measures were implemented it would cut the average return on equity anywhere from 5.4% to 13.3%, hindering economic growth and raising costs for banking services.
JP Morgan analyst Nick O’Donohue warned in a research note, “The cumulative impact of all the proposed regulation suggests that there is a real risk that we may move from a system that was under regulated to one that is over regulated and that that could cause a significant increase in lending costs and a negative impact on the economy.”
The most impacted banks would likely be the two British partially-nationalized banks, Royal Bank of Scotland and Lloyds Banking Group.
Pretax profits among the largest banks would be cut by about $110 billion. Net income for 2011 would likely halve to about $74 billion, JP Morgan estimates.
Some of the world’s largest economies are coordinating efforts to re-regulate the banking industry to prevent a second financial crisis. Some of the plans being brought forth include increasing liquidity requirements, separation of commercial and investment banking, and caps on size of institutions.
“In order to return to similar levels of profitability as per current forecasts, we estimate that pricing on all products (retail banking, commercial banking and investment banking) would have to go up by 33 percent,” O’Donohoe said.
