Citigroup CFO Gerspach Sees Banks’ Low ROE as Deterrent

Citigroup Inc. Chief Financial Officer John Gerspach said investors may abandon shares of U.S. banks if the industry’s return on equity doesn’t improve.

“If you take a look at the return on equity that most financial institutions are producing these days, there’s reason to think that the profitability is really not enough to sustain continued investor involvement,” Gerspach, 59, said today on a call with fixed-income analysts.

Return on equity, a measure of profitability, has plummeted since the financial crisis to less than 10 percent at many firms as capital levels rose and legal costs and slow economic growth weighed on earnings. ROE exceeded 20 percent at some banks from 1997 to 2007.

Citigroup’s ROE was 8.8 percent at the end of June, according to the New York-based company’s second-quarter financial supplement, down from 20.1 percent for the same period in 2007. The lender took a $45 billion rescue package from taxpayers in 2008 to avoid collapse, which it later repaid.

Government bailouts have prompted calls for tougher capital requirements, to avoid a repeat of the financial crisis. Gerspach’s remarks came in response to a question about whether rising quarterly profits would act as justification for lawmakers to impose new regulations.

Citigroup, the third-biggest U.S. bank, boosted second-quarter profit 42 percent to $4.18 billion, the company said this week. JPMorgan Chase & Co., the largest lender, recorded net income of $6.5 billion for the period, and No. 4 Wells Fargo & Co. posted a record profit of $5.52 billion.

Bernanke Questions

Sherrod Brown, a U.S. senator from Ohio, asked Federal Reserve Chairman Ben S. Bernanke this week if banks’ profit gains show that stricter rules aren’t hurting as much as executives had warned.

“It’s no surprise that mega banks are doing quite well,” said Brown, a Democrat who has introduced legislation with Republican David Vitter to further boost capital standards. “Yet they continue to claim that regulations -- new regulations, impending regulations -- are killing them.”

Gerspach said there’s “a long path” between discussions in Congress and actual legislative action or regulatory rule changes.

Mark Costiglio, a spokesman for the lender, declined to comment beyond Gerspach’s remarks.