Major UK banks back in black
ALL five major UK banks recorded a profit in the first half of the year, for the first time since 2010, according to KPMG.
Combined profits of some £16.5bn, modest lending growth and falling impairments all show that the banking sector is starting to get back on track after the financial crisis.
However, KPMG said the industry emerging is very different to how it was before the crisis started and is adjusting to a future in which it said bank business models are “unlikely ever to be the same again”.
KPMG’s Bank Performance Benchmarking Report explores the key trends in the first half results of the big five UK headquartered banks – Barclays, HSBC, Lloyds Banking Group, RBS and Standard Chartered – and warns that, despite this better performance, real threats and uncertainties remain.
Whilst overall lending was up – including mortgage lending up by 0.8% or £5bn – and customer deposits grew by 6% or £135bn during the period, Return on Equity (ROE) remains in single digits. ROE has roughly halved compared to 2005 levels, from near 20% to under 10% now – and this looks unlikely to reverse in the near-term. This is accentuated by the fact that average capital ratios have increased from 11.4% to 12%.
Approaching 20% of first half statutory profits were wiped out by the continuing need to set money aside against PPI claims (£2.3bn) and interest rate hedging products (£700m). The need to make cost and efficiency savings is also restraining performance, with £1.9bn spent on integration and restructuring costs in H1 2013. Over the last two and a half years, the total costs of remediation and litigation amongst the top five banks equates to 45% of total profit before tax.
Bill Michael, EMA head of financial services at KPMG, said: “While it is great that the most recent bank results are in the black, there remains real uncertainty on the shape of their business models in the future. We have reached an inflection point. Capital requirements are going to put huge pressure on banks to deleverage.
“The fear is that we will end up with a UK banking sector with very narrow choice, where individuals will not be able to get the products they need. We have to get the balance right between prudence and growth.”
KPMG’s report also warns of other more systemic threats than the familiar mis-selling issues.
