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Balance sheet optimisation: The returns dilemma

Balance sheet optimisation

The financial crisis caused a disparity between the expectations of bank investors and end-of-year returns. We outline how to close that gap.

Peter Rothwell - Partner, Banking Risk Management, KPMG UK

Partner, Banking Risk Management

KPMG in the UK


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The global financial crisis has caused a disparity between the return expectations of bank investors and the end-of-year figure they receive. Structural reform, however, may be able to bridge that gulf.

Low or negative rates leading to depressed margins; rising costs due to post-crisis regulation change; and the requirement for banks to increase capital margins are just three of the reasons why banks are struggling to meet investor expectations.

Banks could be in the worst of both worlds — income opportunities are reducing, while investor expectations (on a risk-adjusted basis) are rising. The gap between returns on capital and cost of capital is clearly unsustainable.

In this article, we offer advice on how banks can redefine balance sheet management to meet these challenges, through:

  • Improving the efficiency of local balance sheets;
  • Focusing more on product sets;
  • Increasing active liability management and re-allocation of capital. 

In many ways, the regulatory landscape is moving in a direction that hampers banks’ efforts to improve returns on capital. The traditional means through which banks have typically driven capital efficiencies oppose the two main drivers impacting on regulation: the growing focus on legal entity integrity and the scepticism about internal models. However, that doesn’t make it impossible.


Read our full report Balance sheet optimisation: the returns dilemma for bank (1.2 MB) to find out our four-step response to help banks reduce the returns gap. 

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