Member Article

KPMG doubt future profitability of UK banks

A new report has raised concerns over the future profitability of UK banks, who have suffered significantly at the hands of the Eurozone crisis, PPI costs, the bank levy and regulatory requirements.

In 2011, the big five banks, Barclays, HSBC, Lloyds Banking Group, RBS and Standard Chartered made combined pre-tax profits of £19.4 billion, down £2.9 billion on profits previously reported. This followed a year of aggressive cost cutting and restructuring, including the offloading of non-core businesses which saw retail banking faring better than investment banking.

Richard Gabbertas, KPMG’s Northern head of financial services believes that it was a much tougher year than expected, and banks will need to continue working hard to turn things around.

He commented: “I expect we will see continued cost costing – which inevitably means further job losses – and business models will be reviewed again to ensure banks are concentrating on their core strengths and the markets with the greatest potential.

“The banks with larger exposures to Asian economies were the star performers, which reinforces how the UK and Europe are becoming relatively difficult places for banks to do business.

“HSBC, which has 49% of its business based in Asia and Latin America, and Standard Chartered, with 80% of its business in Asia and the Middle East, outperformed the more UK and US focused banks.”

As the amount of liquidity and capital required to write business in the UK becomes higher than in other jurisdictions, it is increasingly difficult for banks without an international focus to achieve the return on equity expected by investors.

He continued: “The UK bank levy knocked a significant dent in the profitability of all banks and PPI and other customer redress had an even more significant impact. In addition, the cost of regulation is starting to bite and this will not ease off anytime soon, especially as work on implementing the Independent Commission on Banking recommendations and recovery and resolution plans heats up.

The impending introduction of a new regulatory regime will also present the significant challenge of managing a dual regulatory relationship with both the prudential and conduct supervisors.

Mr Gabbertas added: “All in all, banking in this country requires major changes in business models and remuneration levels for staff to meet the increased capital requirements. Banks can improve their capital ratios either by raising capital or de-leveraging. At present they are finding it tough to generate capital and it is therefore easier to reduce overall lending.”

This was posted in Bdaily's Members' News section by Ruth Mitchell .