Further pain is ahead for UK banks as the sector struggles to reconcile the conflicting demands of investors, customers, regulators and government according to a KPMG report which analyses the 2013 results of the UK’s five largest banks.
Headline figures show that total assets have fallen 25% over five years to £5.2tn, capital reserves have been boosted by £93bn since 2008 and the banks have faced a £28.5bn bill for litigation, fines and customer redress.
KPMG’s report, Reinvention of UK Banking, highlights that as the cost of remediation – both in financial and resource terms – continues to dominate results presentations, banks face an uphill battle as they try to radically transform in a timeframe that is acceptable to all stakeholders.
The report also outlines the challenge of lower returns on equity - currently below banks’ cost of capital - which are not only constraining banks’ ability to offer more, and better priced, products to customers but could also impede their ability to attract capital.
Richard McCarthy, UK head of banking at KPMG, commented: “To be viable businesses and support economic growth, banks need to make sensible returns for investors but they must do so at the same time as delivering value to customers. This equilibrium is proving an ongoing challenge to achieve, especially with all of the new regulation and additional capital and risk management costs. At the moment, small steps are being taken and we are slowly inching closer to getting this right. But what the banks really need is a total metamorphosis in their business models."
“Banks must be given space to focus on the future and then, in turn, be held accountable by regulators to deliver certain levels of progress within prescribed timeframes. While the direction of regulatory travel has been set – with clear calls for more capital, governance, and changes to culture and behaviour – banks need further clarity about what ‘success’ for the customer looks like in the eyes of the regulator.”
KPMG’s report highlights that 80% of the 2013 profits of the five largest UK banks went towards remediation costs. Richard McCarthy continued: “It is important that people are adequately reimbursed for mis-selling, but large remediation bills hinder investment in the business. Ultimately, it will be customers who lose out if banks can’t invest in their future."
“In particular, technology is ‘mission critical’ to the future health of the sector. Banks are essentially giant technology companies and currently many of the operating systems are archaic. Banks need to replace legacy systems, component by component, with new technology and innovative digital delivery platforms supported by world class customer analysis. This takes substantial investment and cannot be done without consideration of the risk posed to customers’ data and finances from the growing threat of cyber attacks. Denial of service attacks are also on the rise. The banks need to be ahead of the game to prevent these, or risk facing avoidable financial difficulties.”
KPMG believes that responsibility for the banking sector’s recovery also lies with regulators, government and investors who need to play strong supporting roles for an effective transformation.
David Sayer, global head of banking at KPMG continued: “It is not just up to the banks. Investors, regulators and the government also have a serious role to play and must work together with the banking sector.
“While banks need to devise new, transparent pricing strategies, review their products, invest in technology and improve returns, regulators must provide clearer guidance about what they expect in terms of customer outcomes so that banks can design products without constantly worrying about back book reviews in the future.
“Most board members of UK banks have taken on their roles post crisis and are committed to making the changes required. We must give bank management time to deliver, which will help restore the trust, viability and reputation of the banks.
“Investors also need to be realistic. They will need patience to allow banks adequate time to rebuild their business models and invest in new technology. They must also readjust their expectations on returns as they are unlikely to achieve the heady pre-crisis levels. However, investors might accept lower returns if delivered by more sustainable business models."
“Our current fear is that there is a drive towards banks offering what the regulator allows, or is perceived to endorse, rather than what the customer actually needs."
“It is also crucial that the government supports the rehabilitation of the banking sector and considers major reforms in financial education such that customers are better equipped to buy more complex financial products.”
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Note to editors
KPMG’s report analyses the published 2013 full year results of Barclays, HSBC, Lloyds Banking Group, RBS and Standard Chartered and is available on request.
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KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and operates from 22 offices across the UK with approximately 11,500 partners and staff. The UK firm recorded a turnover of £1.8 billion in the year ended September 2013. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 155 countries and has 155,000 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. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.