The reformation of the banking sector has entered a new chapter as banks must rebuild shattered trust and confidence, redefine culture and behavior, rein in costs and focus on core businesses, says a new report from KPMG International.
KPMG’s report, Focus on Transparency: Surviving the Storm analyzes the 2011 financial reports of Europe’s 15 largest banks and discusses key industry issues including governance, remuneration and regulation.
Bill Michael, UK head of financial services and a partner at in the UK, commented: “It is clear that the banking sector’s redemption is far from complete and its ‘reformation’ has now entered a new phase. Recent events have made it abundantly clear that banking has no choice but to operate in a fundamentally different fashion. Public confidence in the sector has been dealt another blow and it is critical that banks demonstrate that deep-seated change is afoot.
“This is a watershed moment and there is, quite simply, no turning back now. Excessive bonuses and opaque remuneration packages will no longer be tolerated, nor will passive boards. Shareholders and customers need to be convinced that executive compensation and the company’s long-term performance are appropriately aligned. This calls for much greater transparency in accounting and reporting practices.
“Behavior and culture must also be overhauled and this must be led from the top. The rule-book for what is acceptable conduct needs to be rewritten and accountability across all levels is key.”
Financial analysis in the report shows that combined profits hit 62 billion euros (EUR) at the leading 15 European banks in 2011, against EUR84 billion in 2010. Only five of the largest banks reported an increase in profits over the year, while 10 saw an increase in their cost income ratio, and total incomes shrunk for seven banks.
Retail and commercial banking performance was resilient: loan impairment charges in retail and commercial portfolios fell on average by 10 percent across the group, with the total charge being EUR71 billion in 2011 (2010: EUR79 billion) thanks to improving credit conditions and the management of non-core activities.
On the other hand, net revenues of investment banking reduced on average by 13.5 percent due to the difficult economic and market conditions, especially in the second half of 2011, leading to lower margins and reduced trading volumes which impacted revenues as clients pulled back activity in light of the eurozone crisis.
Bill Michael continued: “European banks are fighting a battle against seemingly insurmountable odds as the short-to-medium-term future looks extremely difficult. Increased capital costs, new legislation, possible transaction taxes and potential litigation are on the horizon – not to mention the ongoing euro debt crisis and escalating situation in Spain.
“With many European banks trading at a discount to net asset value, it is clear that the market is no longer buying the notion of double digit growth for these banks. While shareholders continue to look for a reasonable return on equity, it is still unclear what will emerge as an acceptable rate given we are unlikely to see a return to the highs of four or five years ago. A key challenge for banks is to understand what the ‘new normal’ for the sector is and adjust their business models accordingly.
“The universal banking concept is being seriously questioned. The need and demand for greater transparency will intensify pressure on the sustainability of the universal banking model.”
KPMG’s report also highlights the lack of transparency of financial reporting across the banks, particularly with regard to investment banking results and remuneration.
Bill Michael concluded: “The quality of disclosure in financial reporting remains patchy at best. Investment banking, for example, is defined differently by individual banks, which impairs meaningful comparison. Also, the information provided on remuneration is opaque and inconsistent, making it almost impossible to determine complete remuneration packages. Banks must encourage greater transparency in accounting and reporting practices to help restore public and investor confidence in the sector.”
KPMG’s report, Focus on Transparency: Surviving the Storm, analyzes the published full year 2011 results of Europe’s 15 largest banks.
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