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8/2/2019 Financial Reporting European Banks 2010v2
1/76
FINANCIAL SERVICES
Focus onTransparency
Financial reporting of
European banks in 2010
The calm betweentwo storms?
July 2011
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This is the th year o Focus on Transparency, the
KPMG European banking survey o banks annual
reports, where we not only look at certain areas o
accounting policy and disclosure, but also examine
the key issues aecting banks as presented by the
banks themselves.For the rst time we have included a chapter on
chairmen and chie executive ocers statements.
This refects how chairmen see the main topics
presented to shareholders, such as overall perormance,
the role o banks in society, compensation policy,
regulatory reorms and uture trends.
We have also added a chapter on emerging risks
and issues, which incorporates inormation on legacy
risks rom activities linked to the credit crunch, the
emergence o sovereign debt (particularly Eurozone
debt) as a key risk actor, as well as other issues
such as bank levies acing the banking sector.
We have continued to comment on key areas o
disclosure and accounting policy aecting banks,
notably the impact o air value, capital, unding and
liquidity, impairment, and key judgements and estimates.
There were signicant movements in oreign exchange
markets over the last 12 months making like-or-like,year-on-year comparison across the 15 banks in the
report dicult. To eliminate these eects we have used
31 December 2010 exchange rates or both 2010 and
2009 gures. In addition, 2009 gures are based on
2009 comparative gures in the nancial statements
as at 31 December 2010.
There are 15 banks included in the survey, which refect
a large demographic o European banks reporting under
International Financial Reporting Standards (IFRS).
up
nd
d
Barclays
HSBC
Lloyds Banking Gro
Royal Bank of Scotla
Standard Chartere
BBVA
Santander
BNP Paribas
Socit Gnrale
Nordea
ING
Commerzbank
Deutsche Bank
UBS
UniCredit
The ollowing people made signicant
contributions to this publication:
Sophie Sotil-Forgues
Caroline GallagherKenza Bellakhdar
Vesselina Hinovska
Mathieu Mangelinck
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ContentsExecutive summary 1
1. Insights 5
Chairmens and CEOs statements
2. Perormance 11
Focusing on investment banking
3. Impairments 25
Analysis o allowances and write-os
4. Challenges 31
Legacy risks and emerging issues
5. Intangibles 43
Non-nancial assets
6. Capital 47
Regulatory challenges
7. Liquidity 57
Maturity and sources o unding
8. Governance 65
Executive remuneration and governance
Changes ahead 72
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1 EXECUTIVE SUMMARY
Executive
summary
Key fndings
2010 was a less volatile year than 2009
...but with regulatory change cited as one o the most signicant
challenges acing the banks in 2011, and the sovereign debt crisis
adding signicant uncertainty
was 2010 the calm between two storms?
Combinedprotshit85billionattheleading15Europeanbanksin2010, double the previous years prots
but major reductions in impairment charges fattered the bottom line.
Chairmenandchiefexecutivesbelievetheirbanksarewellplacedforrecovery, ocusing on core businesses and relationships
but accept need to rebuild trust and condence while sounding notes
o caution over an uncertain uture.
Retailandcommercialbankingperformanceimprovedamidemerging market activity and economic recovery...
butinvestmentbankingrevenuesfell2%to123billion,duetolower transaction volumes and increased competition.
All15EuropeanbankshaveCoreTier1capitalinexcessoftheminimum8%prescribedbyBasel2butproposedregulatoryrequirementsunderBasel3will
be challenging.
92.5billionofdeferredtaxassetsrecognisedonbalancesheetsimpliesapproximately334billioninfuturetaxableprotsbut the gure remained the same as the previous year, suggesting
urther challenges or the banks.
Banks ace a volatile uture
that will once again placethem under severe strain
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary o KPMG Europe LLP and a member rm o the KPMG network o independent member rms aliated with KPMG International Cooperative, a Swiss entity.
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2 EXECUTIVE SUMMARY
The calm between two storms
Driving new changes
Europes leading banks are staring at a
nancial storm that could wreck their ragile
recovery. While some may have hoped that
2010snancialresultsofthe15largestEuropean banks signalled a clear road
ahead, the growing sovereign debt crisis in
the Eurozone could drive that hope away.
Combined with the rising tide o
regulation, restricted liquidity and weakcondence, the banks ace a volatile uture
that will once again place them under
severe strain.
T
at
he2010reportsshowedagreatertention to sovereign debt risk than
in previous years, with speculation o
government bail-outs or Portugal and
Spain, in line with those or Ireland and
Greece. All the banks commented on
this debt, although not all have a
material exposure.
But the speed o developments was notoreseen at the time the annual reports
were being written. While government
bail-outs were discussed in the 2010
reports with Greece receiving unding in
May 2010, Ireland in November 2010 and
Portugal in May 2011 debt restructuring
in the rst quarter o 2011, and its potential
impact on the banking sector, has become
anissueofgrowingconcern.Thelatestround o European Banking Authority
stress tests will require the banks to
disclose sovereign debt exposure by
accounting portolios, maturities and
countries.Thiswillexposethelevelofriskacing the banks, and sovereign debt could
be the vanguard o another banking crisis.
Lower impairments drive profts
Thegoodnewsisthatprotsgrewin2010:thecombinedprotsforthe15bankshit85billionin2010.Thatwasdouble2009sgureof43billion,andavastimprovementon2008scombinedlossesof25billion.Onlyonebankremained in a loss making position, but
even here the losses were substantially
reduced.
Despite this, the banks are rightly cautious,
seeking to avoid any premature optimism
their chairmen and chie executives
acknowledge that the sector is ar rom
out o the woods.
However, a substantial amount o the
increased prots came rom a signicant
decrease in loan impairment charges.
Impairmentsfell29%to80billionin2010.Thesedecreasesappearedtooffsettheeect o reduced revenues, particularly in
investment banking.
Therewereothercontributorstotheincrease in protability. Some o the
banks pointed to strong perormances in
emerging market activities those banks
that are particularly active in Asia and Latin
America benetted rom the continuing
growth in these regions.
Somewhat higher derivative air values
were also reported due to restored
condence and improved trading
volumes, especially in the second hal
o the year. At the same time, divesting
non-core activities and ocusing onclient relationships (a key eature o the
chairmens reports) remained key trends
or the year.
Thedeferredtaxpositionsmeritparticular comment, as on the ace o it
they refect growing optimism. In total,
92.5billionofdeferredtaxassetswereheldonbalancesheetat31December2010,representingaround334billiono prots that will be taxed in the uture,
comparedto90billionat31December2009.Intheseuncertaintimes,theviewon availability o uture prots couldchange quickly, resulting in the potential
write down o some balances.
92.5billionofdeferred
tax assets were held
on balance sheet at
31December2010,
representing
around
334bno prots that will be
taxed in the uture
A substantial amount o
the increased prots
came rom a signicant
decrease in loanimpairment charges
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary o KPMG Europe LLP and a member rm o the KPMG network o independent member rms aliated with KPMG International Cooperative, a Swiss entity.
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3 EXECUTIVE SUMMARY
Views rom the top
For the rst time, our survey looks in
detail at what is being said by Europes
banking leaders. We have reviewed the
chairman and chie executive statements
and ound there is a moderate sense o
growing, albeit muted, condence, with
reerences to substantial improvement
and a time o progress and renewal.
In these statements, the chairmen andCEOs address a number o varied topics
relating to the past and coming years.
Common issues include the overall
perormance o their bank during 2010
in the context o the economic and
market conditions, the role o the bank
in society, compensation policy, and
some o the years challenges, notably
regulatory reorms. As or trends ahead,
the main topics are uture perormance
and strategies, the economic outlook and
anticipated challenges.
For all the banks, 2010 is reported as asuccessfulyearcomparedto2009,with
allbaronenowshowingaprot.The
statements provide an indication o the
key drivers or this success there has
been an improvement in income in some
activities, coupled with the decrease o
risks and costs through, or example,
synergies in the businesses.
Quality capital
All the banks disclosed their Basel 2
capital adequacy ratios, which increased
overallwithanaveragerateof14.83%in2010comparedwith14.41%in2009.Most o the banks also calculated and
voluntarilydisclosedtheirCoreTier1ratioinpreparationforBasel3standards.All the banks that chose to do so showed
animproved
ratio
compared
to
2009,
refecting an increase in the quality o
capital held mainly due to the
combined eect o a net increase in
2010 results and a conservative dividend
policy.In2009,bycontrast,CoreTier1capital increases were more the result
o share issuances and state support.
First quarter 2011 statements tend
to conrm the ongoing reinorcement
o this ratio due to notably strong
quarterly results, capital issuances, or
management o risk weighted assets.
WiththecoreprinciplesofBasel3nowmapped out ollowing the November2010 meeting o the G20, one third o the
banks indicated their ability to meet the
newrequirementsin2013.Sevenbankshighlighted the areas o detail that need
urther development and implementation
by national supervisors, such as the
countercyclical buer and additional
requirements or systemically important
nancial institutions.
Although supportive o the new
regulatory ramework, the banks
generally consider that the constraintwill have a cost.
Basel 2 capital adequacy
ratios increased overall
with an average rate o
14.83% in2010
But a concern or many
banks is the disparity
o regulation aroundthe world
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary o KPMG Europe LLP and a member rm o the KPMG network o independent member rms aliated with KPMG International Cooperative, a Swiss entity.
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4 EXECUTIVE SUMMARY
Who will bear that cost?
In our view, the new rules will have an
impact on protability and return on
equity or the banks.
Change ahead
Asin2009,thependulumstillswingstowards tighter and better regulation,
shown by the swathe o guidance on
topics such as remuneration, more and
higher quality capital, diversication o
sourcesoffunding,andliquidity.Thereisa ocus on harmonisation across Europe
in these areas. Although the banks say
they welcome better regulation, they
openly acknowledge the challenges it
will bring, ranging rom sta training and
system updates, to driving how the bank
conducts its business and ensure returns
to shareholders despite increased
capital costs.
But a concern or many banks is the
disparity o regulation around the
world. Some countries are makingstrident changes to their regulation.
Other jurisdictions seem to regard the
creditcrisisof2007/2008asmoreofa
European and US issue, and are making
lessnotablechangestoregulation.This
disparity is a double-edged sword. On
the one hand it seems to provide an
opportunity or large global banks to
book their business in a less regulated
jurisdiction. On the other, a bank
continuing to book business in Europe
could be subject to various regulations,
not all o which are applied harmoniously
across the countries.
At the same time, the banks remain
under scrutiny over remuneration
policies, and the shit towards
longer term incentive schemes
continues. Ring-encing retail and
investment banking operations remains
high on the agenda. Bank levies now
aect more than hal o the surveyed
banks. Dividend policies are now moreconservative than in previous years.
It is no surprise that the chairmen and
chie executives emphasise their ocus
on core businesses, the development
o high quality relationships and the
continuation o cost eciency policies.
But the road ahead looks ar rom
certain, with urther tests on the
horizon.Theoutlookforthoseinthedriving seat looks tough.
Europeanalignment oremuneration
guidancein 2011
Ring-encing retail and
investment banking
operations remains high
on the agenda
Focus on core businesses,
the development o high
quality relationships and
the continuation o costeciency policies
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary o KPMG Europe LLP and a member rm o the KPMG network o independent member rms aliated with KPMG International Cooperative, a Swiss entity.
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5 INSIGHTS
Chairmens and CEOs statements
Highlights
2010:
A remarkable year,substantial progress,great performance
Looking ahead: Condenceof the banks in their future
success
First quarter 2011 resultsconrming the trends
In their statements to shareholders, the chairmen and CEOs
addressed various topics related to the past and coming years.
Common issues addressed included the overall perormance o
the bank during 2010 in the context o the economic and marketconditions, the role o the bank in society, compensation policy,
and some challenges o the year, notably regulatory reorms.
As or trends ahead, the main topics discussed were uture
perormance and strategies, the economic outlook and
anticipated challenges the industry has to ace in the
coming years.
Full year 2010
Overall group perormanceThechairmansandchiefexecutiveocers statements are a useul
summary o the banks perspective
on the year. Every bank in the sample
presented a chairmans report highlighting
the results and challenges o the year.
Eight banks complemented these
statements with ones by their chie
executive ocers (CEO). In two cases
(UBS and BNP Paribas) the chairman
and CEO jointly prepared one letter to
shareholders. Meanwhile, Barclays, RBS
and Standard Chartered presented a
detailed report rom the chairman o the
Audit Committee in their annual report or
thersttime.Thisisatrendweexpecttosee develop in uture.
For all the banks 2010 was a successul
yearcomparedto2009,forwhichtheresults were viewed more as a return to
protability or a year o progress. Overall
perormance was characterised by the
chairmen as substantial improvement,
substantial progress, a good year,
a successul year, a much improved
balance o prots in 2010, a remarkable
year, a crucial year, an important
milestone, a time o progress and
renewal, the groups nancial rebound
or a great perormance. A summary o
the key drivers o the 2010 results was
generallyprovided.Themainreasonsgiven were an improvement in income
in some activities, coupled with the
decrease o risks and costs through, or
example, synergies in the businesses.
Thechairmengenerallycommentedonincreased protability in their core credit
businesses such as retail and commercial
banking as economic conditions
improved, despite lower interest rates
tending to tighten interest margins. For
those banks more active in Asia and/
or Latin America such as HSBC and
Deutsche Bank there were also higher
revenues rom retail and commercial
banking rom those regions. Another
important driver o 2010 protability
indicated by six banks (Nordea, UBS,
Lloyds Banking Group (LBG), Barclays,
BNP Paribas and HSBC) was the
reduction o loan impairment charges.
Contribution o investment banking
activities to the results was more
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary o KPMG Europe LLP and a member rm o the KPMG network o independent member rms aliated with KPMG International Cooperative, a Swiss entity.
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6 INSIGHTS
attributed to a decrease o credit losses
or impairment charges than to an increase
in trading revenues.
Five banks (LBG, ING, UniCredit, RBS and
Commerzbank) carried out divestments
or balance sheet reduction programmes,
principally in order to reduce risk levels.
For almost all banks a prime ocus
o 2010 was reducing costs. It was
expressed in dierent terms such as
strong attention to eciency (RBS),
achievement o cost synergies and
savings (Commerzbank), discipline
over cost base (UBS), restructuring
the cost base (UniCredit) and ocus
on controlling costs (Santander).
LBG mentioned an improvement o its
underlyingcosttoincomeratioof4.5%,whereas HSBC presented a rise in its
ratioof3.2%duetohigherstaffcostsand investments related to strategic
initiativesacrossthebusiness.TheHSBCCEO talked about the need to reengineer
the business in order to remove
ineciencies.
Major events o the year, such as
acquisitions or the on-going process o
integrating new entities or our banks,
werenotedinsuccessfulterms.Thechairman o Deutsche Bank reerred
to three acquisitions: Postbank, the
commercial banking activities o ABN
AMRO and Sal. Oppenheim/BHF-BANK.
Similarly, the chairman o Commerzbank
commented on the completed integration
o Dresdner Bank and qualied this
merger as one o the biggest projects
inthehistoryofGermanbanking.Theintegration o BNP Paribas Fortis and BGL
BNP Paribas was presented as a success,
and the chairman o BBVA reerred to
theacquisitionofGarantiBankinTurkeyas a potential source o growth. INGannounced the sale o its insurance and
investment management activities by
two public oerings planned in 2011.
Capital and liquidity were two main
themes attracting comment, ahead
oftheimplementationoftheBasel3requirements, with the chairmen or CEOs
saying the capital and liquidity positions
o their banks were strengthened
in2010.ThechairmanandCEOofSocit Gnrale mentioned the strict
management o scarce resources that are
capital and liquidity. Five chairmen and
all CEOs (UBS, Barclays, BNP Paribas,
HSBC and Santander) highlighted the
riseoftheirTier1orCoreTier1capitalratio.ThechairmenofUBSandHSBCnotedtheincreaseoftheirTier1capitalratios resulted principally rom increased
prots in 2010, whereas others put their
strengthened ratios down to capital
issued or a decrease in risk weighted
assets. Following its acquisitions during
the year, the chairman o Deutsche Bank
reerred to its biggest capital increase
in the banks history to strengthen its
capital base. More conservative dividends
policy and retained earnings practices
also contributed to reinorcement o Core
Tier1capital(seechapter6oncapital).ThechairmanofBarclaysdiscussedthestress tests run by the Committee o
European Banking Supervisors (CEBS)
in2010andnotedhisrmsTier1ratiowas among the highest o the European
banks. A related issue to stress tests is
that o systemic risk, upon which the
chairman o HSBC expressed mixed
views. Other banks discussed the issue
elsewhere in their annual reports, but
not as detailed commentary in their
statements to shareholders. While the
chairman o HSBC agreed with reinorcing
supervision on so-called Systemically
Important Financial Institutions (SIFIs),
he expressed concerns over the additional
capital charge being discussed or theseinstitutions and noted the potential
unintended consequences that these
institutions may become preerred as
Reengineering the
business in order to
remove ineciencies
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary o KPMG Europe LLP and a member rm o the KPMG network o independent member rms aliated with KPMG International Cooperative, a Swiss entity.
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7 INSIGHTS
counterparties (due to their incremental
capital requirements), potentially leading
to urther concentration o the industry.
Economic context
Little detailed inormation was provided
onlastyearseconomiccontext.Theenvironment in 2010 was qualied as
complex by the chairman o BBVA or
tumultuous by Socit Gnrales.Thechallengingconditionsinwhichbanks operated in 2010, even i global
condence and stability had started
to be rebuilt, were mentioned in three
statements.ThechairmanofSantanderreerred to a very dicult economic
and nancial environment. Also,
two chairmen mentioned the global
economic recovery with continuing
dierential growth rates across nations.
ThechairmanofBarclaysmentionedaglobalGDPgrowthof5%in2010ledby emerging markets, whereas growth
in most o the developed countries was
generally below trend. Furthermore,
the chairmen o ve banks (Barclays,
Socit Gnrale, Deutsche Bank, RBS
and Santander) noted the diculties in
the Eurozone without giving any detailed
inormation. Regarding the global
economic and nancial situation, the
chairmen o Barclays and Deutsche Bank
expressed the view respectively that it
is too early to say that the nancial crisisis over or the worst is behind us but
we are not out o the woods yet.
The role o banks in society
Thethemeofthepublicroleofbankswasdiscussedinalmostallreports(13banksoutof15),whichisnotsurprisinginthecontext o recent political pressure on
the industry.
Five chairmen (LBG, Barclays, RBS,
Standard Chartered, Socit Gnrale)
recognised the major role o banks innancing the economy. For example,
among these banks our provided gures
on new lending commitments taken
in 2010 towards local and worldwide
customers (mortgage customers, SME
customers,othercompanies,etc).Theth gave inormation on the growth o
its lending activity during 2010. One bank
provided additional inormation on its
on-going commitments or 2011.
In eight statements (UBS, LBG, Barclays,
ING, HSBC, Deutsche Bank, RBS,Santander), the chairmen mentioned
the banks support or communities or
the social actions they undertake. For
instance, the chairman o Deutsche Bank
acknowledged its commitment towards
its corporate social responsibility
illustrated by the nancial support o
education, community development and
artprojects.ThechairmenofBarclaysand ING mentioned their initiatives to
demonstrate their behaviour as good or
global citizens.
Compensation policy
Conscious o the public debate
surrounding the issue, six chairmen
(Standard Chartered, RBS, UniCredit,
ING, LBG, Barclays) addressed the topic
o remuneration policies, stating notably
that they were in line with the regulatory
changes (deerrals and clawbacks or
variable remuneration, equity instruments
insteadofcash).Threechairmenreferredto their 2010 bonus pool, indicating
their variable remuneration policy is nolonger directly linked to the years results
and is more aligned with long term
shareholdersinterests.Thechairmano Barclays noted the 2010 bonus pool
was down 7% and the chairman o RBS
mentioned a 2,000 cap on immediate
cashbonuses.ThechairmanofLBGsaid the payout under our Group bonus
schemes or 2010 is a small percentage
ofoverallrevenues.TheCEOofBarclaysreerred to a new compensation policy
or senior employees, which links uture
pay-outs to the Groups core capital
position(seechapter8onremuneration).
A very dicult economic
and nancial environment
Remuneration policy
continues to attractsignicant public debate
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary o KPMG Europe LLP and a member rm o the KPMG network o independent member rms aliated with KPMG International Cooperative, a Swiss entity.
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8 INSIGHTS
Regulatory reorms
Regulatory changes were a pervading
theme. Most o the chairmen said
they support the on-going regulatory
reorms. In particular they discussed the
publication in December o the nal
Basel3rules,whichwillimposeincreased capital and liquidity
requirementsontheindustry.Theregulatory changes were viewed
as reshaping the banking industry
environment.ThechairmenofBarclaysand Nordea qualied the new business
environment as the New Normal. While
the regulatory reorms generally are seen
as creating a challenging environment,
some chairmen indicated they could
also be a source o new opportunities.
Specically regarding the new liquidity
requirementsunderBasel3,HSBCandNordea noted the continuing uncertainties
aroundthenewrules.TheCEOofNordeaalso anticipated longer maturity undingand less maturity transormation.
A rst favour o the impacts o the new
regulatory ramework was provided in
certain cases, but generally without
anyquantitativedata.ThechairmanofUBS indicated they were in the process
o analysing the impacts on the rm
o all new regulations and the eect
they may have on the protability o our
businesses.ThechairmenofHSBCand Nordea mentioned their banks are
meeting the basic capital requirementminimumthreshold.ThechairmenofSocit Gnrale and Deutsche Bank
said their banks expect to meet the new
prudential requirements in particular in
termsofcapitalin2013,andtwoothers(ING, UniCredit) plus the CEO o LBG
said they are in a relatively good position
tomeetthem.ThechairmanofSocitGnralementionedatargetcoreTier1ratioofaround8.5%atend2013.TheCEO o Nordea mentioned the negative
impact on their return on equity o the
Basel3capitalandliquidityreforms.
Looking ahead
Future perormance and strategies
Although they did not provide gures
on their uture protability, 12 banks
expressed condence in their uture
success. Expressions such as the bank
begins 2011 in a solid position, well
positioned or uture success, excellent
growth prospects and 2011 will be a
yearofimprovementwereused.Thechairman o Socit Gnrale mentioned
atargetof6billionofnetincomeby2012.ThechairmanofCommerzbankanticipates rom 2012 an operating prot
beore regulatory eects o approximately
4billionperyear.Throughoutthestatements,futurestrategies o the banks were discussed
withoutanyspecicdetails.Threegeneral priorities were dened:
i) A ocus on core businesses: some
banks stated they prioritised risk
reduction through a decrease innon-coreassets.TheCEOofRBSmentioned that he aims at building the
quality and quantity o Core prots.
ii)Thedevelopmentofhigh-qualityrelationships with customers: the
chairman o UniCredit characterised
the ocus on client relationships as
Real-LifeBanking.ThechairmanofUBS reerred to its we will not rest
campaign to ocus on clients.
iii)Thecontinuationofcosteciency policies.
Other strategic intentions were expressed
by some banks. HSBC and LBG aimed at
maintaining a prudent liquidity position.
TheCEOofHSBCmentionedthexingo a maximum advances-to-deposits ratio
fortheGroupof90%intheriskappetitestatement o the Group. Furthermore,
some chairmen mentioned the need
to strengthen their brand image or
reputation (Socit Gnrale, UBS
and UniCredit).
Longer maturity unding
and less maturity
transormation
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary o KPMG Europe LLP and a member rm o the KPMG network o independent member rms aliated with KPMG International Cooperative, a Swiss entity.
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9 INSIGHTS
Based on 2011 Q1 press releases, the
trends announced by the chairmen
seem to be conrmed. Globally the
banks o the sample perormed well,
comparing avourably to the results o
the rst quarter o 2010. Core businesses
continued to generate growth and
disposals o non-core assets seem
to continue, with impairment charges
remaining at low levels.
Economic outlook
Only a ew chairmen gave their view o
the economic outlook. Some provided
inormation on orecast growth in
certain economic zones, whereas others
commented on nancial markets.
ThechairmanofBarclaysmentioned
globalgrowthdownaround4.25%in2011 due to less rapid growth in Asia and
Latin America, where monetary policy has
begun to tighten due to higher infation.In the chairmans statement rom Socit
Gnrale, growth disparities in developed
countries were announced. A orecast o
1.5%growthintheEurozoneandnearly
2.5%growthfortheUSeconomywasprovided.Theresurgenceofsovereignrisks at the beginning o the year and
the preoccupying situation in the Middle
East and North Arica aecting the price
o oil and condence was noted by the
chairmen o Barclays and the CEO o
HSBC. Both expect a positive resolutionto the situation in the Middle East and
North Arica.
HSBCs CEO and Socit Gnrale
reerenced the cyclical volatility or
erratic movements in the nancial
marketsin2011.Twootherchairmen(RBS and Santander) expected a rise in
interest rates during 2011. Conversely,
the CEO o HSBC commented that
low interest rates in many developed
countries will continue at least in the
near-term.
Shareholder value
Delivering long-term shareholders
value was among the main concerns
ofthechairmenandCEOs.TheCEOofHSBC targeted uture returns on average
shareholdersequityof12%to15%.Similarly, the CEO o Barclays stated
that the bank must be in position to
deliveratleasta13%returnonequity.At this stage there continues to be a widerangeofdividendpolicies.Thechairmeno ve banks (BNP Paribas, Socit
Gnrale, HSBC, Standard Chartered,
Deutsche Bank) recommended the
paymentofacashdividend.Threeotherchairmen (UBS, Barclays, and ING)
indicated they wanted to maintain a
conservative dividend policy, notably
due to coming regulatory reorms.
Delivering long-term
shareholders value
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10 INSIGHTS
Rebuilding trust and confdence
Following years o nancial and economic
crisis, seven chairmen (LBG, Barclays,
ING, HSBC, Nordea, RBS, UniCredit)
recognised there is still a need to rebuild
the trust and condence o stakeholders
(customers, employees, shareholders,
etc). In the words o LBGs chairman: we
have much work to do as an industry to
rebuild trust and understanding.
Even i messages o optimism are
dominant in the statements, particularly in
relation to results and protability, there is
a cautious and prudent atmosphere given
the economic and regulatory uncertainties
the banks are acing.
Therstquarterresultsof2011seemtoconrm the trends o 2010 and expected
neartermsuccess.TheCEOofBarclaysdeclared that the bank has made a good
start in 2011 in a challenging external
environment and making good progress
on execution in line with strategic
priorities.Thiswasmirroredbythesentiments expressed by the chairman
o Commerzbank, who said the bank
has got o to a great start in 2011.Meanwhile, the CEO o Nordea reerred
to a strong quarter and the CEO o
BNP Paribas to a very good
perormance and strong prot-
generation capacity across all the
operating divisions.
Group net income (ME) 1st Quarter 2011 4th Quarter 2010 1st Quarter 2010
HSBC 3,040 2,574 2,122
BNP Paribas 2,616 1,550 2,283Santander 2,108 2,101 2,215
Deutsche Bank 2,062 601 1,762
UBS 1,405 1,293 1,712
ING 1,381 130 1,230
Barclays 1,186 NP 1,250
BBVA 1,150 939 1,240
Commerzbank 985 257 708
Socit Gnrale 916 874 1,063
UniCredit 810 321 520
Nordea 742 770 643RBS - 619 14 - 291
LBG - 2,858 - 2,177 198
Total 14,925 9,247 16,656
Note:Pressreleases/interimmanagementstatementsrelatedtoresultsasatMarch31,2011NP: not published
DatanotavailableasofMarch31,2011forStandardChartered.Exchangeratesusedasat31March2011forallquarters.Source: KPMG International, July 2011
Strong prot-generation
capacity across all the
operating divisions
Banks welcomed
successul
Q1 2011
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11 PERFORMANCE
Overall perormance with ocuson investment banking
Highlights
Decreased loan impairmentcharges
Stable asset volumes
Difcult environment for
investment banking
Global economic recovery continued during 2010. However, the
levelofeconomicactivityremainedpoor.Twothirdsofglobal
GDP growth was attributable to emerging economies, especially
Asia and Arica, while growth in the West remained ragile.
Signicant decreases in loan impairment charges were reported
by all banks, which seemed to oset the eect o reduced
revenues, particularly in the investment banking space.
Overall group perormance
Income statement
Key drivers to the improved bottom lines
reported by banks during 2010 refected
in the graph opposite were identied as
signicantly lower impairment losses
on loans and strong perormance romemerging market activities. Somewhat
higher derivative air values were also
reported due to restored condence and
improved trading volumes, especially
in the second hal o 2010. Focusing on
strengthening client relationships and
divesting non-core activities remained
key trends during the year. All banks
reported increases in their prot beore
tax gures, other than Deutsche Bank,
UniCredit and LBG. Deutsche Bank
ascribed the decrease to the one-time
charges relating to IFRS accountingimplications to its three acquisitions
o Postbank, parts o ABN AMRO and
Sal. Oppenheim/BHF-BANK during the
year. LBGs decrease in prot beore tax
was attributed to the gain on acquisition
ofHBOSincludedinits2009results,while UniCredits decrease resulted rom
impairment o goodwill and recognition o
deerred taxes.
Thelargestincreasesinprotswere reported by HSBC, Socit
Gnrale, BNP Paribas, ING, UBS andCommerzbank, with the latter three
making a comeback to protability ater
reportinglossesduring2008and2009.
ING attributed the improvement to
exceptional perormance in its banking
operations, which more than oset losses
suered in its insurance operations. It
also reaped the benet o divesting anumber o non-core activities over the
past two years, which generated net
gains on sales during the current year and
o-set some one-o expenses, such as
goodwill write-downs in the Insurance
reporting unit in the United States,
write-downs o deerred acquisition
costs, and expenses relating to various
restructuring programmes.
UBS attributed its enhanced protability
primarily to signicant improvements
in income rom trading businesses,
especially the investment banks xed
income, currencies and commodities
revenues,coupledwithanalmost66%reduction in its credit loss expenses,
slightly lower operational expenses due
to lower net restructuring costs included
in the current year, a signicantly larger
valuation gain recorded on an option to
acquire SNB StabFunds equity,
and reported gains on sales o
some operations.
Commerzbank also reported improved net
trading income, supported by much more
avourable nancial market conditions,
Successul year,
Good perormance,
Recovering economicenvironment
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12 PERFORMANCE
Overall performance - Profit before tax (Million )
0
15,000
12,000
9,000
6,000
3,000
-3,000
2009
2010
-6,000HSBC BNP Santander Barclays BBVA UBS Socit Standard ING Deutsche Nordea UniCredit Commerz- LBG RBS
Paribas Gnrale Chartered Bank bank
Source: KPMG International, July 2011
substantially lower loan loss provisions and
the elimination o special charges reported
in the prior year, connected largely with the
integration o Dresdner Bank.
HSBCs protability was also attributed to
a signicant decrease in loan impairment
charges and an increased share o
associates prots driven by the strong
results in Asia.
BNP Paribas attributed its successul year
to the improved economic environment
and successul merger o the BNP Paribas
Fortis and BGL BNP Paribas entities,
wheresynergieswere30%inexcessoftheoriginalestimate(900million)withmarginally higher restructuring costs.
Socit Gnrale reerred to its
geographically-diverse international retail
banking operations, record perormance
by its insurance operations and growth
in vehicle leasing, coupled with
improvement in the perormance o
its legacy assets.
Balance sheet
2010 witnessed rail increases in
assets overall. Many o the banks
continued their strategies o divesting
non-core and legacy assets, while
others searched or opportunities
presentedbyemergingmarkets.Theyear was marked by continued market
and regulatory uncertainty, with banks
choosing to ollow more conservative
policies: ocusing on maintaining
existing asset balances and
strengthening liquidity.
Thesearchforoptimumreturnonassets continued to preoccupy
key decision makers within banks.
Scarceness o capital made it more
costly and, with existing uncertainty
around the nality in regulatory reorms,
banks have been trying to dispose o
lower earning, lower quality assets and
replacing them with better quality ones.
Were balance sheet
reductions in 2010 to
reduce risk...
...or just to shrink the
balance sheets to matchavailable capital?
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13 PERFORMANCE
Total assets (Million )
0
2,500,000
2,000,000
1,500,000
1,000,000
500,000
2010
2009
BNP Deutsche HSBC Barclays RBS ING Santander LBG Socit UBS UniCredit Commerz- Nordea BBVA Standard
Paribas Bank Gnrale bank Chartered
Source: KPMG International, July 2011
Deutsche Bank, Santander, Socit
Gnrale, Barclays and, to a lesser
extent, HSBC, ING, BBVA, Nordea and
Standard Chartered reported increases in
totalassets.Theremainderofthebanksreported decreases.
ThelargestassetincreaseswereatDeutscheBank(27%),Barclays(8%)and Socit Gnrale (11%). Deutsche
Bank attributed its large asset increase to
acquisitions during the year, particularly
Postbank, which contributed a signicant
increaseinitsloanbook.Theremaindero the asset increase was a result ooreign exchange dierences, particularly
between the US dollar and Euro, which
represented about 20% o the total asset
increase. Positive market values rom
derivatives, which ell substantially in the
prior year, urther contributed to the nal
increased asset balances.
Socit Gnrale attributed the increase
to its strategy o growing its customer
base in Europe, including some
targeted acquisitions during the year,
such as Socit Marseillaise de Crdit,
Metropolitan West Asset Management
and increasing its share in Rosbank.
Barclays similarly has increased trading
portolio assets, seen derivative air
values improve and increased loans to
customers, in part thanks to its
acquisition o Standard Lie Bank.
Thesmallerincreasesinassetsreportedby other banks were predominantly
attributed to improved derivative
asset values and increased lending to
customers, with a varying mix between
commercial and retail lending.
By contrast, BNP Paribas, RBS, LBG,
UBS and Commerzbank reported total
assetdecreases.Theywereprimarilyattributed to divestments, with a
realigning o operations and ocus on
their core businesses, as in the case
o RBS, LBG and Commerzbank. For
Commerzbank, RBS and LBG, total asset
reduction was part o risk reduction
measures undertaken to restructure their
balance sheets and reduce risk.
BNP Paribas explained its reduction in
total assets by various decreases in loans
and receivables, oset by increases in
the air value o various nancial assets.
Meanwhile, UBS described its assets
movement as the eects o unavourable
Marginalincrease intotal assetsfor8ofthe15banks 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary o KPMG Europe LLP and a member rm o the KPMG network o independent member rms aliated with KPMG International Cooperative, a Swiss entity.
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15 PERFORMANCE
interest rate business also contributing
signicantly to revenues. In addition,
M&A reported considerable progress,
while the acquisition o parts o ABN
AMRO in the Netherlands has provided
Deutsche Bank with a signicant number
o new clients.
Barclaysreporteda25%decreaseintop-line income rom the exceptional
performanceenjoyedin2009.Thiswaspredominantlyattributedtothe35%decrease in trading income rom xed
income, currency and commodities
products, due to lower contribution rom
rates and commodities, and subdued
market activity in European equity
derivatives.Thefallwaspartiallyoffsetby an increase in ee and commission
income, with higher contributions rom
the Asian markets.
HSBC also reported a decrease in net
operating income (beore the eects o
impairmentcharges)of9%,mainlydueto lower net interest income rom the
maturing o higher yielding investments,
low interest rates and fattening yield
curves. Lower trading income was also
attributed to uncertainty in the Eurozone.
BNP Paribas reported an 11% decline in
investment banking revenues rom the
prioryear.Thiswasduetoasignicantdecrease in xed income revenue,
stemming rom uncertainties rom
sovereign debt risks in some European
countries. However, it was oset by an
improvement in advisory and nancing
incomes.
Thebanksthatexperiencedthehighestgrowth rate in revenues during the year
are (in descending order):
1. Commerzbank
2.UBS3.SocitGnrale4.DeutscheBank
Commerzbank and UBS attributed
their growth in revenues to increased
transaction volumes and decreased
impairment charges.
RBS showed a signicant decrease
in revenues rom investment banking
operations, attributed to increased risk
aversion in the market during the second
hal o 2010.
Market risk
Themeasurementandmonitoringofmarket risk associated with trading
activities continued to be an area o
increased interest or banks. In addition,
disclosures relating to market risk
exposures, objectives, policies and
processes or managing market risk, and
methods used to measure the risk are
compulsory in accordance with IFRS 7
Financial Instruments: Disclosures.Market risk is the potential or loss
o uture cash fows or unavourable
changes in air values o nancial
instruments due to adverse changes
inmarketratesorprices.Theprimarycategories o market risk identied by
all banks as impacting on their business
activities are interest rate risk, oreign
exchange risk and price risk associated
mainly with commodity and equity prices.
Value at Risk (VaR)
VaR is a technique used to estimate the
probability o portolio losses arising rom
uture potential adverse movements
in market rates, prices and volatilities,
based on the statistical analysis o
recent historical market price trends and
variances. It is a measure o how much
money the bank can lose in one day i
some market variables were to change.
Theprocessinvolvestherevaluationofexisting positions, by taking into account
the eects o historically observed market
riskfactorsonthecurrentportfolio.Thusevents that have happened in the past,
such as interest rate increase/decrease
Signicant decrease in
impairment reported
by all banks
Thebankswiththetoprevenuesgenerated rom investment banking
activities ater write-downs are
(in order o magnitude):
1.DeutscheBank20.4billion(2009:Barclays20.8billion)
2.Barclays15.5billion(2009:DeutscheBank18.8billion)
3.HSBC13.8billion(2009:HSBC16.5billion)
4.BNPParibas11.7billion(2009:
BNP
Paribas
13.5
billion)
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16 PERFORMANCE
1 Day Trading VaR as disclosed (Million )
164.
6
212.
35
95.
9
60.
5
250 2010
80.9
2009
114.
1
200
70.
9
121
150
60.9
7
71.7
6100
56.
04
64.
25
50
54.5
5
43.3
2
0
42
RBS Commerz Nordea Deutsche HSBC Barclays UBS BNP Socit UniCredit Santander BBVA ING Standard LBG
63
-bank Bank Paribas Gnrale Chartered
99% 99% 99% 99% 95% 95% 99% 99% 99% 99% 99% 99% 97.5% 95%
41.
7
30.
4
35.
5
39.
9
29.
6
27.
5
28
31
19
27
7.
24
9.
96
7.
24
14.
59
Source: KPMG International, July 2011Note:Spot1DayVaRwasusedasat31December2010,exceptforSocitGnralewhereaverageVaRwasavailablefromtheannual report. Deutsche Bank has excluded Postbank rom its 1 Day trading VaR. For Nordea, total VaR has been used as
trading VaR was not disclosed separately.
1 Day Trading VaR as a % of trading revenue (Percentage)
20092010
0
1
2
3
4
5
20
30
RBS Commerz Nordea Deutsche HSBC Barclays UBS BNP Socit SantanderUniCredit BBVA Standard LBG-bank Bank Paribas Gnrale Chartered
99% 99% 99% 99% 95% 95% 99% 99% 99% 99% 99% 97.5% 95%Source: KPMG International, July 2011Note: Nordea VaR refects total VaR as trading VaR was not shown separately.
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17 PERFORMANCE
o x%, are applied to the current portolio
o the bank to calculate a potential loss.
Back testing is usually perormed in order
to assess the reliability and accuracy o
the VaR model outcome, by comparing
the VaR estimate to the actual losses
incurred.Thehigherthecondence
level used in the model, the higher the
VaR number and there will be ewer
instances o outliers, i.e. when the actualresults are not close to the estimates.
TheBaselCommitteeonBanking
Supervision proposes that institutions use
acondencelevelof99%,whichwouldimply that only two to three breaches o
the VaR estimate should take place during
the year.
Interpreting VaR
VaR output is a single number
representing an estimate o the maximum
expected loss o a portolio over the
holding period (usually set at one day)at a given condence level. In practice,
VaR cannot be used or comparison
between banks, as banks use alternative
estimates and assumptions in their
models. For example, the use o dierent
condence levels can either increase or
decrease the VaR number, with all other
inputs being the same. In addition, it can
reasonably be expected that a bank with
a higher VaR number would have bigger
trading operations, should all the banks
risk appetites be within a similar range.
VaR can be used to assess the banks
risk year-on-year and also to assess the
potential portolio loss, but only when
looked at against the banks trading
operations size. In other words, a more
comparable view or market risk between
the banks could be a ratio o the VaR
number to trading revenue.
All banks used a one-day holding period.
A99%condencelevelwasusedbythe majority o banks, except or LBG,
Barclaysand
UBS,
which
used
a95%
condence level, and Standard Chartered
whichuseda97.5%level.Thehistoricalobservation period applied in the VaR
methods varied amongst the banks
betweenoneandtwoyears.Thisimpliesthat market trends having occurred in the
last one to two years are used as inputs
to estimate uture portolio outcomes.
UBS was the only bank to use a dierent
historical observation period (o ve
years), that implies higher volatility data
was included in UBS calculation.
Most banks disclosed lower dailytradingVaRresultscomparedto2009,predominantly driven by reduced volatility
across various asset classes, reduced
exposures due to lower client activity
and rolling o o highly volatile historical
data points. However, Socit Gnrale,
UBS and Commerzbank reported
slight increases in daily trading VaR.
Rationalisation or the increase was,
respectively, exposure to the Eurozone,
which refected the risk o debt struggles
in peripheral European countries,execution o growth plans in investment
banking operations, and change to its
internal market risk model.
Theratiocalculatedinthegraphonpage16wascalculatedinordertocreatea more comparable picture o market
risk between the banks. We took the
trading VaR disclosed by all banks as a
percentage o their investment banking
revenue, ater write-downs, to arrive
at a potential percentage loss. For the
majority o banks, the potential loss romtrading activities seems to be around less
than 1% o trading income.
VaR limitations
Despite its wide application, the VaR
model has a number o shortcomings.
Theseshouldbeconsideredwhenrelyingsolely on the VaR output to assess and
analyse market risk.
Theuseofpastmarkettrendstopredictthe uture in VaR methodology implies
the past would repeat itsel, which does
not always hold true.
Allpastmarkettrendsareequallyweighted.
One-day holding period
assumes assets can
be liquidated within
one day...
...yet three days required
or a recent liquidation o
a signicant position...
...is one-day VaR useul?
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18 PERFORMANCE
Fair value hierarchy of financial assets (Percent)
0
1 1 2 2 3 3 1 1 2 2 4 2 5 4 3 3 2 2 4 5 3 3 2 2 4 5 2 2 4 6100
80
60
40
20
41
5866
33 40
58 60
38 46
5148
49 4944 54 54 62 64 56 59
61 62 62 6271
67 71 7181 80 84 79 80 87 84 82
50 5544 44
34 34 3936 36 35 36 36
25 28 26 2617 18
12 16 1811 12 12
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
BBVA ING LBG Santander HSBCLevel 1 Level 2 Level 3
Socit UniCredit BNP Standard UBS Nordea RBS Barclays Commerz- DeutscheGnrale Paribas Chartered bank Bank
Source: KPMG International, July 2011
Theone-dayholdingperiodassumesassets can be liquidated within one day,
which is not always the case.
Fair value implications
As part o IFRS 7 Financial Instruments:
Disclosure, all banks are required to
disclose air value measurement basis,
the air value hierarchy level or allnancial instruments measured at air
value on the balance sheet, and details o
signicant transers between levels o the
hierarchy.
Thethreelevelstothehierarchy,as
identied by IFRS 7, are:
Level1: air value o the nancialinstrument refects unadjusted quoted
prices or identical instruments in active
markets.
Level2: air value is determined byusing inputs, other than quoted prices
that are observable or the nancial
instrument, either directly or indirectly.
Level3: air value is determined byusing inputs or the nancial
instrument that are not based on
observable market data, i.e. it is
based on unobservable inputs.
Therelativeproportionoftotalnancialassets and nancial liabilities measured
at air value is a good indicator o each
banks trading activities. A higher
proportionofLevel3instrumentscouldurther indicate the banks involvement
in exotic instruments, where market
prices are not available. While a general
trend o decrease in nancial assets and
nancial liabilities held at air value was
noted, refecting the general decrease
in exposures either through divesting or
just general decrease in the air values
o the portolios, trading books have not
diminished signicantly.
Derivative assets represented, on
average, around a third o the trading
portfolioassets.Thiscontrastswiththe
Rolling o o highly volatile
historical data points
resulted in most banks
disclosing lower daily
trading VaR resultscomparedto2009
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19 PERFORMANCE
Fair value hierarchy of financial liabilities (Percent)
5 4 2 2 1 1 5 5 0 0 3 2 0 0 1 0 2 3 2 2 4 5 1 1 1 1 6 9 0 0100
80
60
40
20
0 3 3 1
6870
7573 79
8178 79 88 85 87 86 89
90 88 90 91 88 92 90 88 88 93 94 90 92 91 8899 99
27 26 231620 18 17
2512 15
10 11 10 11 10127 9 6 568 7
19
78
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
ING HSBC Nordea BNP BBVA UniCredit Santander Standard Deutsche Barclays UBS RBS Commerz- Socit LBG Paribas Chartered Bank bank Gnrale
Level 1 Level 2 Level 3Source: KPMG International, July 2011
previous year, where derivative assets
werehalfoftradingassets.Thisdeclinecomes despite an increase in derivative
air values, refecting a drop in derivative
assets volumes held by the banks due to
plannedexposurereductions.Thelargestrepresentations are still being seen by
Barclays(60%oftotaltradingportfoliorepresented by derivative assets),
DeutscheBank(57%)andRBS(54%).Derivative liabilities, on average, refect
just over hal the trading portolio
liabilities, with the highest proportions
seen at Barclays, Deutsche Bank, RBS
and Standard Chartered.
Consistent with previous years, the
proportionofLevel1,2and3nancialassets and liabilities varies between the
banks. However, the most requently
used categories are Level 1 and 2.
Comparison between the banks is
dicult as a result o the high degree o
subjectivity involved in determining the
split between the three categories and
how these are applied in practice. Many
o the banks have tried to acilitate better
understanding by including examples o
nancial instruments that would typically
be classied in a given category.
Financial assets
Itcanbeseenfromthegraphonpage18that Level 1 and 2 categories represent
onaverageapproximately98%oftotalair value nancial assets.
UniCredit has the highest percentage oitsnancialassetsinLevel3,standingat5%,whileDeutscheBank,BarclaysandUBS are ollowing very closely, each with
4%oftotalnancialassetsheldatfairvalue.Thesemainlyincludecollateraliseddebt obligations, collateralised loan
obligations, various bonds trading in
illiquid markets and highly customised
CDOderivatives.Thiscouldindicatetheexistence o Day 1 P&L reserve, less
certainty around balance sheet valuations
and on-going prot and loss impacts.
Thebankswiththehighestpercentageo assets held at air value, as part o total
assets, are:
1.DeutscheBank(61%)2.RBS(54%)3.UBSandBNPParibas(eachwith53%)
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20 PERFORMANCE
Day 1 P&L reserve released to profit or loss (Million )
700
600
500
400
300
200
100
0
Deutsche Socit BNP HSBC
Bank Gnrale Paribas
2009
2010
2 33
96
8 1216
112
21
79115
29
209
161
216
111
377
430389
673
495
361
UBS RBS Barclays Nordea Commerz- UniCredit Standard
bank Chartered
Source: KPMG International, July 2011
Financial liabilitiesConsistent with nancial asset ndings,
the largest category in the nancial
liabilities held at air value is Level 2, as
shown by the graph opposite.
Thebankswiththehighestcompositiono nancial liabilities in the Level 1
category are the leaders rom the
previousyear:INGwith27%(2009:26%)andHSBCwith23%(2009:25%)oftheirnancial liabilities being measured using
quotedprices.Thisindicatesimmediaterecognition in the prot or loss o changes
in own credit risk.
Day 1 P&L
An implication o having nancial assets
and liabilities categorised into the air
value hierarchy is that o the Day 1 prot
and loss eect. For example, i a nancial
instrument is purchased or a certain price
but the bank uses a model to calculate
the instruments value on the purchase
date, there could be a dierence between
the price paid or that instrument and the
value calculated using that model. I the
model used to calculate the instruments
value applies unobservable inputs,
then the dierence between the price
paid or the instrument and the model
value cannot be taken to prot and loss
immediately. In accordance with IAS
39FinancialInstruments:Recognitionand Measurement, this dierence is
released to prot and loss over the lie
o the instrument, when inputs become
observable or when the instrument is
sold.Thiscouldpotentiallycausevolatility in the prot or loss depending
on the amount o that dierencedeerred over time.
Disclosures recommended by IFRS 7
Financial Instruments: Disclosures
relating to the Day 1 P&L incorporate
issues such as accounting policies,
reconciliation o the reserve held at
year-end with movements during the
year, and transers to prot and loss
during the year.
All banks have included some
disclosure around Day 1 P&L,
except LBG, BBVA and ING.
Thebankswiththehighestpercentageo liabilities held at air value are:
1.RBS(47%)2.DeutscheBank(46%)3.UBS(45%)4.Barclays(40%)
Overall, Day 1 P&L
releases not as signicantas in prior years
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21 PERFORMANCE
Day 1 P&L reserve on balance sheet (Million )
2009
2010
0
200
400
600
800
1,000
2 32 1642 44
160116
148 145
189 196195238
453481
622
822796
823
920
860
BNP
Paribas
Socit
Gnrale
Deutsche
Bank
UBS RBS HSBC UniCredit Barclays Nordea Commerz-
bank
Standard
Chartered
Source: KPMG International, July 2011
Day 1 P&L release as a % of PBT (Percent)
-15
0
5
10
15
20
80
100 20102009
12.5
6.9 6.6
84
2.9
-7.8
3.5
4.8
2.11.5 0.6 0.4
3.6
0.31.5
0.2
3.3
00.1
-1-0.3
-25
Deutsche
Bank
Socit
Gnrale
UBS BNP
Paribas
HSBC Commerz
bank
Nordea Barclays UniCredit Standard
Chartered
RBS
-25
Source: KPMG International, July 2011
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22 PERFORMANCE
BNP Paribas and Socit Gnrale
held the highest Day 1 P&L reserve at
year-end. Overall, it seems the reserve
balances have not increased signicantlyrom the year beore, which implies that
signicant uture prot volatility might not
be expected.
Thehighestreleaseofthisreserveto prot and loss or the year was by
Deutsche Bank, ollowed by Socit
Gnrale and BNP Paribas. In terms o
volatility prot or loss, the graph opposite
shows the percentage release to total
prot beore tax. It is evident that this
release has not aected prot or loss
signicantlyin2010.Thismaybedueto the act Day 1 P&L tends to accreteevenly into prot and loss, thereore it is
generally less volatile than other air
value movements.
Fair value gains on own credit
Theinterestingfactaboutfairvaluechanges on own liabilities is that should
a banks credit rating deteriorate, the air
value o its liabilities decreases, which
results in a gain taken to prot and loss.
A corresponding loss will be generated
should the banks credit rating improve.Thiswillhavealargereffectonbanksthat hold a larger portion o their
liabilities at air value.
Thebiggestgainsexperiencedduring2010, and thus decreases in their credit
spreads, were by Nordea, Barclays
and RBS, while the biggest losses and
thus increases in credit spreads were
experienced by BNP Paribas, Socit
GnraleandUBS.Thiscausesvolatilityover the years in the nancial statements,
as refected in the graph below, and hasalwaysbeencounterintuitive.IFRS9removes this accounting treatment or
nancial liabilities held under the air value
option,witheffectfrom1January2013.Such debt will be held either at amortised
cost or at air value, with changes in
own credit risk being recognised in other
comprehensive income and not prot
and loss.
Fair value gains/losses on own credit (Million )
0
2009 20082010
5,000
4,000
3,000
2,000
1,000
-1,000
-2,000
-3,000
-4,000
652445
1,708
203
1,438
43349
28230
13 37 4
4,661
142
2,683
441734
-51
-512
-2,074
-166 -264 -191-8 -46 -89 -176
-347
-1,444
-427-720
-457 -362
-5,000 -4,744
Nordea Barclays RBS Deutsche ING LBG Standard HSBC Commerz- UBS Socit BNP
Bank Chartered bank Gnrale Paribas
Source: KPMG International, July 2011
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23 PERFORMANCE
Derivative assests (Million )
0
Deutsche RBS Barclays BNP UBS Socit HSBC Commerz- Nordea UniCredit Santander LBG ING BBVA Standard
100,000
200,000
300,000
400,000
500,000
600,000
700,000 2010
2009
Bank Paribas Gnrale bank Chartered
Source: KPMG International, July 2011
Derivatives
In accordance with IFRS, derivativecontracts are refected at air value on
the balance sheet, with movements in
the air value being taken to prot or
loss. Derivative values, as seen rom
the balance sheets, give only a broad
indication o the risk exposure o the
bank, since a derivatives air value moves
in line with an underlying asset or liability
or other market variable, and it is urther
exposed to risks such as counterparty
credit risk and wrong way risk.
Thesecontractsarepredominantlyheld
as part o the banks trading portolios or
purposes o client acilitation, arbitrage
and/orspeculation.Thesizeofthederivative portolio is oten indicative
o the banks business model and
investment ocus.
Consistent with previous years, derivative
assets largely oset derivative liabilities,
as seen rom the graph opposite, and
very small net eects can be noted.
Incontrastto2009,whichwastheyearo drastic derivative asset decline across
the banks, 2010 saw modest increases in
derivative market values.
All banks reported an increase inderivative air values over the past year,
with the exception o Commerzbank, BNP
Paribas, UBS and RBS. Commerzbank
attributed its decrease to expansion
in netting, where more derivative
assets and liabilities were allowed
to be netted o against each other.
Overall small decreases are attributed
to oreign currency movements and
lower transaction volumes. A general
improvement was seen in interest
rate and oreign exchange derivatives,
due to movements in orward interest
rate curves and volatility in the oreign
exchangemarket.Thisimprovementwas partially oset by the decline in
values o equity, credit and commodities
derivatives as a result o reduced
volatility.Thelargestincreasewasnotedon Deutsche Banks balance sheet,
which was attributed equally to currency
translation eects and acquisitions.
Consistent with the previous year, the
largest derivative asset balances were
held by Deutsche Bank, RBS, Barclays,
BNP Paribas and UBS, each with over
300billionasatDecember2010.
2010 saw modest
increases in derivative
market values compared
to2009,whichwastheyear o drastic derivative
asset decline across
the banks
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24 PERFORMANCE
Gross derivative positions as at 31 December 2010 (Million )
0 +/-100,000 +/-200,000 +/-300,000 +/-400,000 +/-500,000 +/-600,000 +/-700,000
Deutsche Bank
RBS
Barclays
BNP Paribas
UBS
Socit Gnrale
HSBC
Commerzbank
Nordea
UniCredit
Santander
LBG
ING
BBVA
Standard Chartered
-10,609
-3,631
-17,281
+749
-5,923
+5,536
-1,579
+10,760
-938
+2,253
+2,210
-10,062
+5,435
-2,398
-548
+
-
+
-
+
-
+
-
+
-
+
-
+
-
+
-
+
-
+
-
+
-
+
-
+
-
+
-
+
-
+ Net position
- Net position
Derivative assets gross
Derivative liabilities gross
Source: KPMG International, July 2011
Outlook
2010 showed a mild economic
improvement ater the nancial
crisis, and even though there
were clear signs o recovery, bank
leaders were unanimous that the
global economy remains ragile.
Investment banking perormance,
which makes up a signicant
portion o overall banking
perormance, could not live up to
the record revenues witnessed
in2009.Thesizeoftheasset
portolio does not directly translate
to revenue generating capabilities
anymore, and with the proposed
conservative new regulatory
reorms relating to capital, banks
have become selective with
regards to what assets they
would like to keep on their balance
sheets.Thiswasevidentfromthe
continued divestment o non-core
operations, and by selling lower
earning and lower quality assets
and replacing them with assets
o higher quality and perceived
lowerrisk.That,ofcourse,has
not been easy, as many banks
blamed low interest rates and
fattening yield curves or the lower
returns, especially with many
maturing investments having had
to be re-invested at lower yields.
Without doubt, the uture will be
interesting, although not easy or
the banks.
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25 IMPAIRMENTS
Analysis o allowances and write-os
Highlights
Increased maximum credit
risk exposure
Lower charges for loanimpairment
On the horizon: provisionfor expected losses
Asexpectedandannouncedin2009,impairmentchargeson loans and advances ell signicantly. It refects improving
credit conditions in the main sectors and geographies in which
European banks lend, which led to lower charges across themajority o businesses.
However, many o the banks moderate this assessment since
some national markets are still in crisis.
Maximum credit risk exposure
All banks provided inormation, including
their maximum credit risk exposure as
required under IFRS 7. Commerzbank
disclosed maximum credit risk exposure
net o collateral, probabilities o deault
andeconomicfactors.Forthe14otherbanks, the collateral held to reduce the
exposures is not taken into account in the
disclosed maximum credit risk exposure.
Themaximumexposuretocreditriskrelates to balance sheet and o-balance
sheet nancial instruments, incorporating
the gross carrying amount o nancial
assets including derivatives, the total
amount o committed acilities and the
maximum amounts guaranteed.
In general, the maximum credit risk
exposure increased slightly compared
to2009.DeutscheBankexplainsthatthe increase in credit risk exposures was
driven by acquisitions (mainly Postbank),
which led to a rise in deposits with banks,
nancial assets at air value through prot
and loss, and loans. Similarly, Standard
Chartereds increased credit risk exposure
resulted mainly rom the rise o exposure
to loans and advances to banks and
customers due to growth in the mortgage
portolio and broad-based growth across
several industry sectors in Wholesale
Banking. HSBC reported an increase in
loans and advances to customers, which
was driven by ocussed growth in Asia
in commercial lending and in mortgage
lending within Hong Kong and the UK.
Contribution o o-balance sheet items
to the maximum credit risk exposure
varied signicantly rom one bank to
another,rangingfrom28.1%(RBS)to10.5%(LBG).Themajorityofbanksdisclosedthis inormation in the notes to the
nancial statements, with ve bankspresenting the disclosures in the risk
management report.
In general, the maximum
credit risk exposure
increased slightly
comparedto2009
All banks had
signicant o-balancesheet exposures
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26 IMPAIRMENTS
Maximum credit exposure (Million )
0
500,000
1,000,000
1,500,000
2,000,000
2,500,00022.1%
21.6% 19.8% 18%15.7%
15.9%
14.9%18.7% 10.8%10.9% 20.1%
19.9%28.1%
29.1% 27.3%27.5%
10.5%10.7%
20.1%20.2%13.5%
13.4% 15.3%17.3%15.8% 16.5%
HSBC BNP Barclays Deutsche Santander ING Socit RBS UniCredit LBG BBVA Nordea Standard UBSParibas Bank Gnrale Chartered
Off-balance sheet 100% (%) Off-balance sheet/total credit risk exposureBalance sheet Off-balance sheet exposure
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
is not distinctly identified
Source: KPMG International, July 2011Note: Commerzbank is not presented because it discloses maximum credit risk exposure net o collaterals,
probabilities o deault and economic actors thereore, it is not comparable.
Impairment charges
Theimpairmentchargefortheyear,which comprises the net impairment
allowance (ater releases) or credit
risk on loans to customers and banks,
decreased or most banks in 2010.
Impairmentchargesdecreasedby29%on average across the survey with the
totalchargebeing80billioncomparedto113billionin2009.Thechargewasreducedatleastby30%forHSBC,BNP Paribas, Deutsche Bank, Nordea,
Standard Chartered, ING and UBS.
Only Santander recorded a rise o the
impairmentchargecomparedto2009duenotably to increased bad loans in Spain
and Portugal, the acquisition o Santander
Consumer Finance and a change in local
regulations relating to provisions or
loan losses.
Thedecrease
in
impairment
charges
resulted rom dierent actors such as:
Improved economic conditions inthe USA and UK: Loan impairment
charges or HSBC were reduced in all
regions and all customer groups but
particularlyintheUS(-7,711million),driven primarily by HSBC Finance and
declining impairment charges in retail
and commercial portolios in the UK,
where economic conditions improvedand interest rates remained at
low levels.
ING(-1,248million)experiencedimproving portolio within commercial
banking (mainly in the USA), even i
it was partly oset by the continuing
elevated levels o risk costs in retail in
Benelux, since the economic recovery
in the Netherlands remains ragile.
ForBNPParibas,thechargeforloan impairment at its retail bankingbusiness ell by 22% thanks to
an improvement in all the leading
countries, especially the USA.
Signicant decrease o
impairment charges or
the majority o banks
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27 IMPAIRMENTS
Impairment of loans (Million )
Impairment charge 2009
Impairment charge 2010
0
5,000
10,000
15,000
20,000
LBG Santander RBS HSBC UniCredit Barclays BNP BBVA Commerz- Socit ING Deutsche Nordea Standard UBS
Paribas bank Gnrale Bank Chartered
Source: KPMG International, July 2011
CorporateandInvestmentbankingbusiness: the impairment charges
recordedbyBNPParibasfellto314million(comparedto2,473million),whichincludesa99%decreaseintheprovision or nancing activities.
Improvedriskmanagementprocesses:forLBG,thefall(4,866million)ismainly due to eective portolio
management and improved quality o
new business.
StandardCharteredreduceditschargeforloanimpairmentby55%(770million) as a result o consistently
robust risk management processes
and underwriting standards, as well asimproving economic conditions in
most markets.
Run-offplans:RBSreduceditsimpairmentchargesby4,359millionrom management o its non-core book.
Impactoftheimpairmentchargeontheassets reclassied according to revised
IAS39:DeutscheBanksimpairmentchargefell1,357millionduetolowerprovisions or credit losses related to
exposures in leveraged nance that
werereclassiedin2009intotheloan category, creating a signicant
impairmentchargein2009.
Thedecreaseinimpairmentchargesacross the survey also results rom a
signicantly smaller increase in identied
non-perorming loans.
As can be seen rom the table on the let,
average growth in non-perorming loans
amounts to 10% in 2010, compared to
52%in2009.In 2010, the increase o non-perorming
loans primarily relates to:
Eurozoneexposures,notablyforRBSand LBG (Ireland), Barclays (Spain),
Standard Chartered (Middle East and
Other South Asia region) and Socit
Gnrale (Central and Eastern Europe).
Deteriorationoftheeconomicenvironment in Spain (Santander
and BBVA).
Impairment rate
(provision as percentage o gross
loans and advances)
With the growth rate o non-perorming
loans generally alling, although
the impairment charge is generally
decreasing, the resulting year-end
provision as a percentage o gross loans
and advances has, in act, improved or
the most part.
Movementsin non-
performingloans
Variation (%)2009/2010
Variation (%)2008/2009
Barclays + 68 + 29
Standard
Chartered
+ 25 + 31
Commerzbank + 17 + 25
UniCredit + 16 + 36
Santander + 16 + 73
LBG + 15 + 79
ING + 15 + 39
Nordea + 14 + 91
Socit
Gnrale
+ 10 + 62
BBVA + 3 + 78
RBS + 2 + 80
HSBC - 8 + 21
UBS - 27 - 37
Deutsche
Bank
- 28 + 115
Total + 10 + 52
Note : BNP Paribas had not disclosed its gross NPL
in2008.Therefore,itisnotcomparable.
Source: KPMG International, July 2011
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28 IMPAIRMENTS
Impairment rate (Million / Percent)
Million Loans Percent1,000,000 Percent (%) of loans
3.57%
1.71%
2.33%
3.26%
2.63%2.44%
3.25%2.87% 2.96%
0.79%0.72%
2.27%
5.06%
4.48%
2.60%
3.47%3.06%
2.29%
0.80%
2.59%
1.27%
2.52%
3.05%
0.76%0.73%
2.84%
0.39%
0.94%0.89%1.11%
6
5800,000
4600,000
3400,000
2
200,0001
002010
2
009
2
010
2009
2
010
2009
2010
2009
2010
2009
2010
2009
2
010
2
009
2
010
2009
2010
2
009
2
010
2
009
2
010
2
009
2
010
2
009
2
010
2
009
2
010
2
009
2
010
2
009
HSBC BNP Santander RBS LBG ING UniCredit Barclays Socit DeutscheParibas Gnrale Bank BBVA Nordea Commerz- Standard UBSbank Chartered
Source: KPMG International, July 2011Note:Theimpairmentratepresentedinthegraphaboveistheprovision(individualandcollective)comparedtothegrossloans and advances (banks and customers).
Asin2009,theimpairmentrates(provision as percentage o gross loans
and advances) dier between the banks,
rangingfrom0.39%(UBS)to5.06%(UniCredit). On the whole, the impairment
rates observed in the sample increased,
except or our banks (Deutsche Bank,
Standard Chartered, UBS and HSBC).
Since the impairment charge in 2010 has
generally allen across the survey, the
increased impairment rate (provision as
percentage o gross loans and advances)
is a result o a stable credit portolio, and
thereore an improved percentage.
Deutsche Bank recorded a all in its
impairmentratefrom1.27%in2009to0.80%in2010duetotheriseofGerman
retail loan and commercial real estate
loanportfolios(150billion).ThedecreaserecordedbyHSBCisdueto the growth o loans and advances to
customers in portolios with historically
low loss experience (e.g. Asia) and
the run-o o the higher risk US
consumer portolio.
Non-perorming loans increased at a
lowerratethan2009andgenerallyrepresented a small amount o the
total credit portolios, as shown in
the graph on the next page.
Non-perorming loans
increased at a lower rate
thanin2009andgenerallyrepresent a small amounto the total credit portolios
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29 IMPAIRMENTS
Impaired versus outstanding loans (Million )
0
800,000
1,000,000Impaired loans
Outstanding loans
600,000
400,000
200,000
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
HSBC BNP Santander LBG ING RBS Uni
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