Less regulation not the answer for foreign banks in US

A reduction in regulatory complexity under a Trump administrationwon’t compensate for below par returns for foreign banks operating in the US.

On average, DeutscheBank analysts say major foreign lenders have 20% of their capital ($160bn) investedin the US with sub-par mid-single digit returns.

And a Trump administration, which has stated its desire to roll back financial regulations including Dodd Frank, may not be the answer to their problems. 

“There’s a need to optimise foreign banks' USfranchises,” analyst Kinner Lakhani wrote in a note to clients.

“We see thelikely paths as right-sizing of US ambitions, 'self-help' or an 'opportunistic' strategy of partnerships or bolt-on acquisitions.”

Credit Suisse and HSBC's US operations were loss-making in the first nine months of 2016 while UBS' stronger returns were based on tax writebacks.

The relatively more profitable FBO franchises were the likes of Barclays, BBVA, BNP Paribas and MUFG albeit still sub-scale and making sub-par returns.

Deutsche Bank’s operations in the US have also been profitable this year.

Lakhani’sinsights are based on the financial statements of the banks' intermediateholding companies (IHCs).

Under the newIHC structure, foreign banking organisations (FBOs) are reporting thecapitalization and profitability of their US operations for the first time.

“While tooearly to say, we believe that the FBO regulation is likely to remain intactimplying a shift from home to host (ie US) regulation," Lakhani added.

"Moreover, weexpect upward pressure on ‘go to’ leverage ratio requirements which could resultin further capital ‘trapped’ in the US, notably for the likes of Barclays, UBS and Credit Suisse.

"The quid proquo of this could be a reduction in regulatory complexity although we believethat this is likely to be a necessary but insufficient offset against thesub-par returns."