Sign in Subscribe
Banking industry

The Universal Banking Model is Broken

Strategic Insights

— 1 min read

The large one-stop banks, including JPMorgan Chase and Citigroup, are struggling to deliver profitable returns due to the universal banking model. Despite their size and supposed benefits of scale, these banks have consistently underperformed their specialist peers, with an average return on equity of just 5% over the past five years. This is in stark contrast to the likes of Wells Fargo and Goldman Sachs, which have achieved returns of 12% and 11% respectively over the same period.

Key Takeaways:

  • Universal banks have consistently underperformed their specialist peers, with an average return on equity of just 5% over the past five years.
  • The largest universal banks, including JPMorgan Chase and Citigroup, have been unable to benefit from economies of scale, with high cost-to-income ratios and inefficient operations.
  • Specialist banks, such as Wells Fargo and Goldman Sachs, have outperformed their universal counterparts in terms of return on equity and cost efficiency.
  • The universal banking model has been criticized for its complexity and opacity, which can make it difficult for management to have full control and make informed decisions.
  • Some banks, such as UBS and RBS, have moved away from the universal banking model, while others are still tied to it and need to make significant changes to remain competitive.
  • The US economy is growing, but the universal banks are not benefiting from this trend, with only JPMorgan Chase among the major US banks covering its cost of capital.
  • The average return on equity for the five largest universal banks in the US is just 5% over the past five years, compared to 12% for Wells Fargo.
  • JPMorgan Chase's share price trades at a discount to its peers, despite its efforts to improve efficiency and reduce costs.

Statistics:

  • Return on equity (ROE) for universal banks:

+ JPMorgan: 9.4%

+ Citigroup: 3.9%

+ Bank of America: 4.2%

+ Deutsche Bank: 3.3%

+ Barclays: 5.1%

  • Return on equity (ROE) for specialist banks:

+ Wells Fargo: 12.1%

+ Goldman Sachs: 11.2%

+ Santander: 10.5%

+ Lloyds: 9.8%

  • Cost-to-income ratios:

+ JPMorgan: 63%

+ Citigroup: 72%

+ Bank of America: 88%

+ Deutsche Bank: 75%

+ Barclays: 73%

  • US economy growth:

+ 2014: 2.2%

+ 2015: 3.0%

Sources:

  • "JPMorgan Investor Day" (February 2015)
  • "Berenberg Research" (2015)
  • "Bank for International Settlements" (2013)
  • "Morgan Stanley and Oliver Wyman" (2015)
  • "Deutsche Bank Research" (2015)
  • "Markit" (2015)
  • "Deallogic" (2015)

Read more