Marakon, a Charles River Associates, company, released its research on the banking industry. In the report, “How Healthy Are The Banks? Time To Focus on Value,” Marakon analyzes the banking system and suggests near-term strategic priorities and fundamental changes that will help banks deliver sustainable value growth in 2010 and beyond.

The analysis examined major bank holding companies in the US (assets above US$25 billion), UK & Europe (assets above US$190 billion or market capitalization above US$10 billion), and Asia (assets above US$100 billion). Key findings indicate that major banks are not expected to earn their cost of equity capital. Specifically:

- Four US banks, or 10% of US banking equity capital, are expected to generate returns above the cost of equity; a staggering 90% of capital is not performing.

- Nine UK and European banks, or 30% of equity capital, are expected to generate returns above the cost of equity.

- The situation is somewhat different in Asia where the industry is expected to earn returns just under the cost of capital, but performance varies widely across the region.

In addition, the future profitability of major banks will be much different than their historical performance in the two decades leading up to the financial crisis.

Ron Langford, a Marakon Director specializing in the financial services sector and co-author of the report, said, “The economy and recession have certainly had an impact on the health of the banking industry. Even though the 2009 earnings results season delivered some long-awaited good news for many banks and even when factoring in the changes to the banking environment over the past two years, the data still shows serious signs of distress.”

Marakon Managing Director Neal Kissel, another co-author of the report who specializes in the financial services sector, added, “Many factors, from fiscal policy to macroeconomic conditions, are affecting the health of today’s banking environment but there is no shortage of steps banks can take to improve their returns relative to risk and sustain value growth over time.”

The report emphasizes the importance for banks to improve their focus on: the quality of earnings rather than quantity of earnings; capturing missing risks to intrinsic value—such as liquidity risk; and re-evaluating pricing and other levers that management can leverage to improve the delivery of value creation for shareholders.