It should come as no surprise that banks are not as profitable today as they were before the financial crisis. Between 1994 and 2006, the bank industry's average return on equity typically fluctuated between 12% and 15%. Now it appears to be settling in the high single-digit range.
Should investors assume this is the industry's new steady state? Or are bank profits still being weighed down by legacy issues dating back to the crisis?
The answer is a little of both.
On the one hand, large lenders like Bank of America, JPMorgan Chase, and Citigroup still have elevated credit and litigation expenses dating back to the financial crisis. But on the other, while these issues are driving down profits in the short run, a number of long-term regulatory changes are likely to have a greater cumulative impact on the industry's bottom line.
To learn more about why this is the case, check out the video below, in which Motley Fool analysts John Maxfield and Michael Douglass discuss the current and future state of bank profits in America.