With continuing projected low interest rates, mounting regulatory requirements, redress costs showing no signs of abating and considerable uncertainty, this year’s Bank Benchmark report finds that pressure on the UK’s biggest banks is at an all-time high.
With continuing projected low interest rates, mounting regulatory requirements, redress costs showing no signs of abating and considerable uncertainty around outcome of the EU referendum, this year’s Bank Benchmark report finds that pressure on the UK’s biggest banks is at an all-time high.
KPMG today publish its annual Bank Benchmark report*, key findings include:
Profit before tax fell by 40 percent to £12.4bn and at the same time, there is no evidence of revenue growth. Average net interest margins of 208 basis points have remained stable in an environment dominated by low interest rates and fierce competition. In this challenging environment, return on equity remains low ranging from -4.7% to 7.2% with little good news to cheer investors.
Increasing cost pressure has been a reoccurring theme and 2015 was no different. Despite all the banks making efforts to cut costs, there is limited evidence of success. Excluding redress, costs fell by just 2.9 percent. Total redress cost climbed by 35 percent from £10.6bn in 2014 to £14.3bn in 2015 with PPI mis-selling and Mortgage Backed Securities litigation being the main drivers. Since the FCA’s consultation on PPI was issued at the tail end of last year, four of the five banks have increased their provision for future payments.
Whist overall headcount is down, compensation costs remain stable and are the second biggest expense for high street banks accounting for £38bn in 2015 compared to £37.9bn in 2014, a small increase of 0.12% year on year. Tax has been bearing down on banks in 2015 and the bank levy charge remains high. Tax contributions increased marginally from 2014 to 2015, with taxes paid increasing by 1.5 percent to £5.3 billion. Across the top five, the bank levy rose 21 percent to £2.2 billion.
Impairment charges were little changed from 2014. This continued stabilisation comes at the end of five years of dramatic growth in impairment charges. Banks are increasingly performing more detailed internal stress testing in addition to regulatory stress tests, as part of their risk management processes, in 2015 the falling oil price was a consistent theme in stress testing. Implementation of IFRS 9 in 2018 will almost certainly increase impairment costs for banks as they move to the expected loss model for recording impairments.
Commenting, Tim Howarth, KPMG Banking Partner, said:
“It’s clear that banks are still fighting the problems of the past. Legal fees, fines and compensation costs are making an enormous dent in profits and I don’t expect to see a let-up any time soon. Banks’ are finding it harder to make money whilst the costs just keep coming.“
2016 looks set to be an interesting year. Whilst UK banks are keeping relatively quiet on the EU referendum debate in their annual reports, uncertainty over the outcome is weighing heavily on them. I expect to see a continuation of cost cutting measures like branch closures and headcount reduction but I hope to see more detailed and structured investment in technology. Throughout 2015 banks have been frantically investing in technology to offer a better services more cheaply, but so far there’s little evidence of successful cost cutting and the detail on technology investment is vague.”
*KPMG Bank Benchmark report summarises and makes reference to the 2015 results of the following UK headquartered banks: Barclays, HSBC, Lloyds, RBS and SCB. Information has been obtained solely from published 2015 year end reports (including results presentations and accompanying analyst packs).
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