With unpredictable economies, and highly volatile financial markets, the European banking system is facing one of its toughest tests. Moreover, the situation of many banks has become even more difficult in 2011 with some having to absorb significant sovereign debt writedowns. Now banks need to regain trust, absorb new regulatory demands such as Basel III, reduce costs, focus on core business and increase lending while properly balancing risk and reward.
They also have to satisfy their shareholders. For many banks, these sometimes conflicting demands present a real challenge. For example, Basel III will require banks to significantly increase the level and improve the quality if their capital base, while at the same time they need to be more active in seeking prudent lending opportunities both in their own interests and to promote economic growth.
Despite all the problems and uncertainties surrounding the European banking system, KPMG reveals that the 15 banks included in the study have still reported a cumulated profit in 2011. However, only five of these banks recorded increases in profits, while three banks recorded losses, the latter being mainly affected by write-downs of goodwill and intangible assets and sovereign debt impairment. It is worth mentioning that the 15 banks reported cumulated deferred tax assets of EUR 93.7 billion in their balance sheets which should reflect a positive outlook by these banks in that they expect at least EUR 450 billion in profits that will be taxed in the future.
Since the beginning of the financial crisis, return on equity ratios have declined significantly for all the banks. A clear trend in the most successful banks this year was diversified portfolios, with banks operating in emerging markets faring well. The most profitable bank in terms of return on equity is well diversified geographically and has its focus on the Asia, Africa and Middle East regions, with relatively low exposure compared to peers to markets in the Americas, the UK and Europe.
Another important subject for bank’s executives, capital, increased by EUR 200 billion or 54% across the banks in the study over the last three years while new liquidity regulatory requirements, with Basel III as transposed into CRD 4 on the horizon, provided a shift from short-term unsecured wholesale funding towards longer term secured and stable funding.
Serban Toader, Senior Partner of KPMG in Romania highlights that the priorities of most Romanian banks are somehow aligned to European ones, included in the KPMG survey, namely: focus on core businesses, managing costs, building customer-driven and simpler banking products, adapting to the new regulatory environment while ensuring the required returns to shareholders.
As Cezar Furtuna, Partner in KPMG Romania’s Financial Services Department explains: “The Romanian banking sector has proved relatively resilient in the past year, despite a difficult international and national economic context. On the regulatory side the banks doing business in Romania successfully managed their transition to IFRS as a statutory basis of reporting their financial performance and position starting from 1 January 2012, and are now focusing on analyzing the impact of the new Basel III requirements, most likely to be applied starting 1 January 2013, and implementing them. Our preliminary analysis of the performance of Romanian banks based on recently published 2011 IFRS financial statements shows that return on equity for the entire Romanian banking market was below 3%, more than 50% lower than in 2010 when return on equity was around 6%. The main driver of the reduced performance was a sharp decrease in return on assets, a somehow expected outcome considering the lower yielding investment alternatives that banks face in this uncertain economic context.
Businesswise, sovereign debt crises in the Eurozone are likely to impact significantly banks’ performance and growth if contagion spreads to Romania. Another issue is of more foreign banks defining their Romanian banking entities as non-core operations and withdrawing from the Romanian market or significantly reducing balance sheets, leading to changes in ownership and potential consolidation of the Romanian banking sector”.
As Furtuna concludes; “The KPMG survey presents a comprehensive picture of the performance of European banks in 2011. It should provide interesting reading not only for banking sector professionals but also for all those with an interest in the current European and global economic situation.”
About the survey
"Focus on Transparency" is KPMG’s annual in-depth analysis of Europe’s largest banks financial results. The organizations in the survey reflect a large demographic of European banks reporting under International Financial Reporting Standards (IFRS). Each chapter includes the key and topical issues that banks are currently facing such as the Eurozone sovereign debt crisis, the effects of new requirements such as bank levies and the impending regulatory and accounting changes.