All five major UK banks (Barclays, HSBC, Lloyds Banking Group, RBS and Standard Chartered) recorded a profit in the first half of the year, for the first time since 2010, according to a new report from KPMG.
Combined profits of some £16.5 billion, modest lending growth and falling impairments all show that the UK banking sector is, at last, starting to get back on track after the financial crisis.
However, the industry is very different and adjusting to a future in which, KPMG says, bank business models are “unlikely ever to be the same again”.
In addition, real threats and uncertainties remain. For example:
Whilst overall lending and customer deposits are up, Return on Equity (ROE) remains in single digits having roughly halved compared to 2005 levels.
Average capital ratios have increased from 11.4% to 12% – banks are safer but much less profitable per shareholder £.
Almost 20% of first-half statutory profits were wiped out by the continuing need to set money aside against Payment Protection Insurance (PPI) claims (£2.3 billion) and interest rate hedging products (£700 million).
The need to make cost and efficiency savings is also restraining performance, with £1.9 billion spent on integration and restructuring costs in the first half of 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.
KPMG’s report also warns of other more systemic threats than the familiar mis-selling issues:
Regulatory change: waves of regulatory change, both local and global, appear to be pushing some countries – and the global financial system – beyond the ‘tipping point’ at which the negative impact of regulation on economic growth begins to exceed its benefits.
Speed of reform: the regulatory problem has been exacerbated by the speed at which changes are being implemented. The result of regulators’ actions is that banks are enhancing their capital ratios far ahead of the regulatory timetable to meet market expectations.
Changing leaderships: these changes are coming at a time when a new group of leaders is at the helm of UK banks. At the same time, between 2006 and 2012 more than 75% of non-executive directors and 72% of executive management have been replaced at the five major UK banks.
There is a risk that boards and senior management are forced to become short-termist and risk averse, focused on their institution’s (and indeed their own) immediate safety and survival, rather than looking for a sustainable route back to growth. Regulators need to help them execute this challenging agenda, KPMG says.
Finally, KPGM notes that there has been a move towards a more local and domestic emphasis amongst UK banks.
Barclays is now the only UK bank in the investment banking top ten – the trend appears to be for a smaller, more “vanilla” sector, but if so it will be one less able to compete with a resurgent Wall Street.