If a particular bank product generates a return to allocated capital that is too low, the bank can seek to cut expenses, reprice the product, or focus its efforts on other, more profitable ventures. These profitability analyses, moreover, are conducted on an “apples-to-apples” basis, since the profitability of each business line is adjusted to reflect the riskiness of the business line.
Looking ahead, it can be expected that the profitability of these institutions will be adversely affected this year as the process of deleveraging continues and as spillovers to asset markets and the real economy materialise. The expected slowdown in profit growth is a consequence of possible further valuation losses, increased funding costs, as well as declining non-interest income from securitisation and capital market activities.