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Returns fall as banks struggle to rein in costs" report

The Canary Wharf financial district is seen in east London February 28, 2013. REUTERS/Stefan Wermuth
The Canary Wharf financial district is seen in east London February 28, 2013. REUTERS/Stefan Wermuth

LONDON (Reuters) - The operating performance of the world's top 500 banks deteriorated last year despite widespread restructuring and attempts to cut costs, a report said on Thursday.

Return on equity, a key measure of profitability, averaged 7 percent across the banks last year from 7.9 percent in 2011 once one-time items were stripped out, according to analysis by consultancy McKinsey & Co. Including the one-time changes, RoE improved to 8.6 percent.

Return on equity (RoE) dropped as low as 4 percent across the industry in 2008 after the financial crisis, and remains below the average cost of capital, estimated at 10-12 percent. In the boom years leading up to 2006 many banks' RoE topped 20 percent.

Banks are struggling to rein in costs, and reduced leverage also cut into returns, McKinsey said in its Global Banking Annual Review 2013, released on Thursday.

Expenses across the 500 banks last year were little changed from 2011, and costs as a percent of their assets nudged up to 1.91 percent on average from 1.89 percent, it estimated.

European banks were having most difficulty reducing their costs/assets ratio, the report said.

McKinsey said banks face "a fairly cheerless operating environment", citing muted economic growth, the regression of financial globalization and tougher regulations. Many banks have "not yet made the hard choices needed to turn around performance," it said.

About 90 of the top 500 banks delivered returns that averaged 15 percent, however, thanks to strategies including having a distinctive franchise that customers paid a premium for, being a universal banks with global scale, or a "back-to-basics" strategy, based on steady growth and cost advantages.

The report said they have been rewarded with a share price that trades at about twice their book value, about double the average across other banks.

"Remarkably, many of these banks are not from emerging markets but are thriving in highly competitive, low-growth regions," it said. About a quarter were in the United States.

(Reporting by Steve Slater; editing by David Evans)

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