According to the report the leading 15 European banks converted collective losses of €25bn into profits of €43bn in 2009 - but while investment banking revenues performed beyond expectations, the retail sector remained very challenging, with total loan impairment charges hitting some €110bn and the rate of impairment up across the board. Although economic conditions have improved in 2010, KPMG still sees it as a challenging market for banks.
KPMG's study analyses the annual reports of the leading 15 European banks, and considers a range of areas from performance to capital to governance.
Ilya Kotlov, Head of Internal Audit, Risk and Compliance services KPMG in Russia and CIS says: "Last year the global market was heavily influenced by unprecedented levels of government intervention. This created an environment in which banks were able to generate better than expected results. Their concern now will be to repeat the feat in 2010 as governments withdraw their support. It is by no means certain that they will be able to do so. Investment banking returns will be harder to achieve this year given the lower levels of cheap liquidity available, and margins in the retail sector remain thin with a continued threat of a 'double dip'. Banks remain cautious. Balance sheet management continues to be a top priority in an uncertain and rapidly changing regulatory landscape."
KPMG's study finds that, despite what appeared to be a quiet transactions market, investment banking revenues nevertheless quadrupled in 2009, up to €95bn compared to just €25bn in 2008 - bringing in record investment banking returns for many.
The retail banking market continues to offer leaner pickings, but KPMG found a widespread belief in banks' annual reports that the significant impairment charges in 2009 will at least represent the peak.
Banks have transformed the quality of their capital, according to KPMG, with all 15 of the banks surveyed now having a core tier 1 ratio of at least 8% compared to only two banks in 2008. However, the longer term question is whether investor expectations can be maintained and whether the withdrawal of governmental stimulus and further regulation will see increasing capital requirements putting a squeeze on profitability.
The banks also have €90bn of deferred tax assets (broadly, losses held against tax liability) on their balance sheets, equating to some €300bn of probable future taxable profits that need to be generated to recover them. Against a backdrop of recent performance, the implication is that the sector expects a sustained improvement in profitability in the medium term.
IIgor Korotetskiy, Head of Corporate Governance and Sustainability KPMG in Russia and CIS says: "European banks are disclosing more information than ever before in their annual reports - the average length of which is now up from 325 to around 350 pages. The complexity of bank accounting is such that it can be difficult for any but the most seasoned analyst to fully assess a bank's financial position.
What is clear is that while profitability returned in 2009, tough market conditions combined with rising capital requirements and tightening regulation mean that 2010 will be a challenging year for European banks."
The full version of the report can be found here.