- Core profits before tax jump 45%
- But exceptional items such as PPI wipe out those gains, leading to 40% drop
- Improved investment banking revenues surprise
The UK’s major banks recorded a rise in core profits of 45% in 2012 – to a combined sum of £31.5 billion – only to see that increase wiped out by a mixture of regulatory fines, customer redress provisions and the accounting consequences of improved creditworthiness which left statutory profits down 40% on the previous year at £11.7 billion, according to KPMG.
This £20 billion hit was made up of PPI costs of £7.4 billion, up from £5.7 billion in 2011, other fines and penalties from regulators and redress provisions of £4.7 billion, and a £12.8 billion accounting hit for losses caused by the revaluation of ‘own debt’, reflecting the credit markets’ more positive view on bank issuers and interest rate movements.
KPMG’s Bank Performance Benchmarking Report analyses the performance of the big five banks – Barclays, HSBC, Lloyds Banking Group, RBS and Standard Chartered – and concludes that the improvement in core performance from the banks is due to two main factors:
- Better credit performance –impairment (bad loan) charges have continued to fall with continued low interest rates enabling the majority of customers to pay their mortgages and even reduce their credit exposures.
- Stronger investment banking results – revenues were generally up, especially in rates businesses, helped in large part by more positive sentiment surrounding the future of the Eurozone (although, as events in Cyprus are showing, such sentiment can be short-lived)
Bill Michael, EMA Head of Financial Services at KPMG, said: “Banks had a better performance year in 2012 but their improved core profits were eaten up by fines and other exceptional items, leaving them down on 2011. In terms of their reputations, 2012 was a dire year. This is why it is so important for them to address cultural and ethical perceptions and issues. Restoring customer trust is critical.”
New problem areas that emerged during the year included the Libor scandal, the mis-selling of derivatives products to smaller businesses, systems failures at a number of banks, and weaknesses in anti money laundering controls. Together, these issues have had a massive cumulative impact on public trust in the banking industry – as well as blowing a sizeable hole in the banks’ accounts.
In response, many global banks headquartered in the UK have started top to bottom cultural change programmes, which have included revised conduct codes and mechanisms to stop unwanted behaviours being reinforced through misaligned reward and promotion processes.
Banks are undertaking multi-year transformation programmes with significant up-front costs to core infrastructure, systems and processes. Such programmes are complex and involve significant levels of operational risk and many are yet to deliver. In addition KPMG warns that banks have more cost cutting to do. For many banking businesses in the UK, the era of high margins and high returns is over with these activities beginning to resemble regulated utilities without the returns a regulated utility would expect. KPMG believes that banks need to significantly reduce costs if they are to convince shareholders they can generate returns in excess of their considerably increased costs of capital, liquidity and operation.
Despite the pick-up in investment banking performance, KPMG expects to see a continuing focus from the banks to bring down wage bills by reducing headcount and bonuses, disposing of legacy assets, and repositioning businesses to focus on better-defined areas of core activity.
Structural storm ahead
Bill Michael said: “Overall, banks have made progress. They have strengthened their balance sheets and made strides to bolster their capital. They are becoming better able to carry out their essential function of providing support to businesses and promoting economic growth.
However, the necessary changes to address conduct and behavioural failings will have a significant cost.
“Further, there is a gathering storm of structural and other regulatory changes heading banks’ way – such as ring-fence electrification in the UK, Liikanen, global derivatives market reform, CRD 4, and the EU’s plan for a financial transaction tax and cap on bankers’ bonuses to name but a few. These will continue to require considerable management time and effort. “While many are necessary changes to right the wrongs of the past, more could be done to streamline them and make sure they are consistent, thereby increasing the time and resource available to the most important banking objective of all: driving economic growth.
“2012 was a successful trading year marred by large one-off costs. In terms of the wider economy, although 2013 has begun on a note of renewed optimism, the economic fundamentals have yet to catch up. Banks will be hoping that 2013 will only have one aspect of 2012’s performance – the improved trading results.”
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Media enquiries to:
Mark Hamilton, KPMG Corporate Communications 020 7694 2687
KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and operates from 22 offices across the UK with over 12,000 partners and staff. The UK firm recorded a turnover of £1.8 billion in the year ended September 2012. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 156 countries and have 152,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. KPMG International provides no client services.