Significant banks’ return on equity was less than 6% in the 12 months to September 2019, falling short of their cost of capital, which is estimated at around 8% to 10% for the majority of banks.1 Euro area banks’ market valuations remain depressed, with an average price-to-book ratio of around 0.6, mirroring concerns about weak current and expected profitability.
From a financial stability perspective, persistently low profitability is a concern as it hampers banks’ ability to generate capital organically and to raise capital from market sources. This makes it harder for them to build up buffers against unexpected shocks. Let me also stress, however, that there are significant differences among individual banks.