Uk Banks Performance Benchmarking Report Hy 2012

7/30/2019 Uk Banks Performance Benchmarking Report Hy 2012

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UK Banks: Perormance Benchmarking Report | Half Year Results 2012 a

FINANCIAL SERVICES

UK Banks:Perormance

Benchmarking

ReportHal Year Results 2012

kpmg.co.uk/banking


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b UK Banks: Perormance Benchmarking Report | Half Year Results 2012

Basis o preparation

This report summarises the 2012 interim results o Barclays, HSBC, Lloyds Banking

Group (Lloyds), Royal Bank o Scotland (RBS) and Standard Chartered.

Inormation has been obtained solely rom

published interim and year end reports (including

analyst packs rom results presentations).

Where total numbers are presented it is

the total o the ve banks in the review.

As an example, total assets is the sum o

the total assets o the ve banks, expressed

in sterling. Similarly, i an average numberis presented, it is the average o the ve banks

in the review. We have used simple headline

numbers in our analysis unless stated otherwise;

each bank has its own way o reporting

perormance and this has proved to be the most

consistent method o presenting their results.

HSBC and Standard Chartered present their

results in US dollars ($). These have been

translated into sterling using the relevant period

end or period average rate. Where percentagechanges are presented or HSBC or Standard

Chartered, these percentages are based on

the dollar amounts disclosed by the banks,

rather than on the sterling translation o

those amounts.

Note that any discussion o underlying results

(or, in the case o Lloyds, o combined business

basis) refects a number o adjustments to

statutory gures, as determined by

management. Underlying results will thereore

not be comparable rom bank to bank.

Management reporting in the bank results

ocusses on underlying gures.

Adjustments commonly include:

Eliminationofcurrencytranslationgains and losses

Eliminationofgoodwill,protsandlosses on acquisitions and disposals

o subsidiaries and businesses

Exclusionofliabilitymanagementgainsor air value changes on own debt

Inclusionofsharesofprotsofassociatesand jointly controlled entities within

underlying non interest income

Exclusionofcertainwrite-downsandone-offitems.

2012 KPMG LLP, a UK limited liabil ity 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. All rights reserved.


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ContentsChapter 1: At a glance 1

Chapter 2: Summary 2

Chapter 3: Financial performance 4

Chapter 4: Economic outlook 11

Chapter 5: Banking outlook 15

2012 KPMG LLP, a UK limited liabil ity 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. All rights reserved.


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1 UK Banks: Perormance Benchmarking Report | Half Year Results 2012

2012 KPMG LLP, a UK limited liabil ity partnership, is a subsidiar y o KPMG Europe LLP and a member rm o the KPMG


1. At a glance1

Barclays RBS Lloyds HSBC2 Std. Chtrd.2

2012 2011 2012 2011 2012 2011 2012 2011 2012 2011

Ranking

By profts beore tax 3 2 5 4 4 5 1 1 2 3

By total assets 2 2 3 3 4 4 1 1 5 5

By net assets 3 3 2 2 4 4 1 1 5 5

Statutory proft/loss

beore tax ( billion)0.8 2.6 -1.5 -0.8 -0.4 -3.3 8.1 7.1 2.5 2.3

Net interest margin

(basis points)189 197 192 200 193 212 237 254 230 230

Cost to income ratio 80.3% 70.6% 64.0% 56.0% 54.3%3 48.0%3 57.5% 57.5% 52.3% 54.0%

Impairment charge

( billion)1.8 1.8 2.6 5.1 2.7 4.5 3.0 3.3 0.4 0.3

Return on equity 0.3% 5.9% 10.2%5 13.9%5 -4 -4 10.5% 12.3% 13.8% 13.0%

Impaired loans to loans and

advances to customers4.2%6 4.8%6 8.6% 8.6% 9.4% 10.1% 4.1% 4.3% 1.8% 1.6%

Impairment cover 50.2% 49.5% 51.1% 48.5% 48.7% 46.9% 42.3% 42.1% 56.9% 64.0%

Total assets

( billion)1,631 1,564 1,415 1,507 961 971 1,699 1,654 400 388

Net assets( billion)

63.7 65.2 75.2 76.1 46.6 46.6 111.3 107.5 27.5 26.8

Core Tier 1

ratio10.9% 11.0% 11.1% 10.6% 11.3% 10.8% 11.3% 10.1% 11.6% 11.8%

1. All numbers that relate to the income statement are or the six months ending on 30 June o the year and the balancesheet numbers are as at 30 June 2012 and 31 December 2011 respectively.

2. HSBC and Standard Chartereds numbers are presented in US dollars, converted to sterling so as to present the data inthe same currency. At 30th June 2012 /$0.6404. Average or 6 months to 30th June 2012 /$0.6342. The exchange ratesused were obtained rom www.oanda.com.

3. Cost to income ratios are the published fgures reported in the fnancial statements.

4. Lloyds did not report return on equity.

5. RBS reports a core return on equity.

6. The calculation o impairment cover and impaired loans and advances to customers uses credit risk loans published byBarclays in its interim results.
http:///reader/full/www.oanda.comhttp:///reader/full/www.oanda.com


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UK Banks: Perormance Benchmarking Report | Half Year Results 2012 2



2. Summary

While there were some bright spots in the interim results o the UKs fve

major banks, notably in underlying retail and commercial banking

perormance, a key challenge or these banks is to plot a route back to

strong and sustainable proftability in the ace o economic and regulatory

headwinds.

Perormance results

The interim results o the UKs ve major banks show that statutory prots increased

20 percent relative to the rst hal o 2011 but were down 17 percent compared with

thesecond

half

of

last

year.

Overall,

the

big

ve

banks

made

combined

pre-tax

statutory prots o 9.5 billion in the rst six months o 2012, compared with

7.9 billion and 11.5 billion in the rst and second halves o 2011 respectively.

Economic ragility means consumer condence remains subdued, hurting demand

or credit and investment products. At the same time, sustained low interest rates in

many developed economies are putting intense pressure on banks liability margins

as they compete or deposits in order to reduce or replace wholesale unding.

Together these actors mean that growing net revenue is proving to be a real

challenge.

However,thelowinterestrateenvironment,aidedbyde-riskingandstrengtheningo bank balance sheets in recent years has resulted in impairment losses in

domestic markets being held at historically low levels. Further contributing to the

bottom-lineisthecontinuedemphasisbytheUKbanksoncuttingormaintainingcosts whilst managing investment spend in emerging markets.

Economic outlook

The nancial crisis o 2008 continues to cast a long shadow and prospects or 2013

are shrouded in uncertainty. The situation in Europe remains precarious a

resolution o the crisis is not only crucial or the region but more generally or the

rest o the world. A negative rst hal o 2012 conrmed that the UK had entered a

double dip recession. Economic data since has been distorted by the Jubilee holiday

and Olympics, so amongst all the noise it will be dicult to ascertain the underlying

state o the economy. Yet the big picture is that output has been essentially fat orthepasttwoyearsandremainssome4percentbelowpre-recessionlevels.


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Banking outlook

UK banks currently ace a number o conundrums. Firstly, while it has become

increasingly clear that it is not good or the economy i banks continue to reduce

lending; the role that banks can play in the broader UK growth agenda remains

undened. Secondly, banks continue to ace a major regulatory agenda which is

dicult to implement whilst operating in an unstable market. Banks are increasingly

being treated as regulated utilities; yet when compared with other utility companies

such as telecoms and energy businesses, their returns, and subsequent appeal to

investors, are currently signicantly lower.

The banking sector has been plagued by a number o exceptional events and issuessince the crisis which are making it dicult to predict what the new normal looks

like. The latest series o incidents and ailures have urther eroded customers trust

in banks and may possibly lead to a new wave o regulation. Despite the ongoing

cost cutting exercises that have been implemented across most organisations,

these have not generated the required improvement to cost to income ratios, which

have remained fat. I the business climate does not improve markedly in the near

term, more severe restructuring programmes may be necessary.




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H12009

H22009

H12010

H22010

H12011

H22011

H12012




3. Financial perormance

Jon Bingham, Banking Audit Partner

The roller-coaster ride o UK bank proftability in recent years continued

into the frst hal o 2012, with the total statutory proft o the fve major

UK banks surveyed increasing 20 percent in the frst hal o 2012 compared

to frst hal o 2011, but down 17 percent on the second hal o last year.

2009 2010 2011 2012

5

(5)

10

15

20

Profit before

tax (bn)

Many o the causes o this white knuckle experience remain unchanged rom previous

periods,being:underlyingeconomicfragility,de-riskingandstrengtheningofbankbalancesheets,sovereigndebtcrises,mis-sellingpracticesandregulatorypressures.However,the nature o their impact has changed over time:

Underlying economic ragility has resulted in sustained low interest rates in many

developed markets and subdued consumer conidence (reducing the demand or credit

and investment products). This leads to a real challenge in growing revenue and has

resultedinfallsinnetinterestmarginsandnon-interestincomeacrossanumberofthebanks surveyed.

De-riskingandstrengtheningofbankbalancesheets(particularlyinRBSandLloyds),together with the low interest rate environment has resulted in impairment losses being

maintained at historically low levels. There have also been restructuring programmes at anumber o banks as they seek to reduce costs and deploy capital more eiciently across

their businesses.

Increased ocus on the eurozones debt problems during 2012 has had less direct

inancial eects (with the sovereign debt impairments experienced in the irst hal

o 2011 not being repeated), however, the related market volatility has resulted in

signiicant movements in the air value o banks own debt (resulting in a combined

7.5 billion loss in the income statements o our o the ive banks surveyed).

Whilst the economy will ultimately recover rom the inancial crisis, the impact o

regulatory change precipitated by the crisis is unlikely to reverse. The irst hal results o

the banks surveyed include 3.8 billion in provision or various regulatory conduct and

litigation matters, however, the ull costs o the suite o regulatory initiatives (includingstrengthened capital and liquidity requirements) are almost impossible to quantiy.

The combination o these actors has meant that shareholder returns have remained low

(and negative in some cases) and are likely to remain so or the oreseeable uture.


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Notable items and one-o adjustments

The banks statutory results include a number o notable or unusual items that have had a

signicant impact on the reported prots but do not necessarily orm part o the core

results. In addition, each bank makes adjustments to arrive at its own underlying prot

measure; and it can be challenging to achieve a consistent measure in making

comparisons.

The table below shows adjustments o the statutory prot and loss or these items to

derive a theoretical core prot measure.

Barclays RBS Lloyds HSBC Std. Chtrd

H1 H1 H2 H1 H1 H2 H1 H1 H2H1 H1 H2 H1 H1 H2

billion 2012 2011 2011 2012 2011 2011 2012 2011 2011 2012 2011 2011 2012 2011 2011

Statutory proft / (loss) beore tax on

continuing operations0.8 2.6 3 .2 (1 .5 ) ( 0.8 ) 0 (0 .4 ) ( 3.3 ) (0 .3 ) 8.1 7.1 6.5 2.5 2.3 1.9

Regulatory and litigation costs

PPI costs 0.3 1.0 0 .3 0.9 1 .1 3.2 0.6 0.41 0.21

Provision or interest rate hedging

products redress0.5 0.1 0.2

UK bank levy 0.3 0.3 0.2 0.4 0.1LIBOR setting 0.3

Provisions or anti money laundering

allegations, sanctions etc 0.4

Other

Sovereign debt impairment 0.7 0.4 0.1 (0.1)Integration and restructuring costs 0.1 0. 7 0.4 0.7 0.5 0.7 0.8 0.4 0.3 0.4(Gain) / loss on revaluation on

own debt2.9 (0 .1 ) (2 .6 ) 3.02 0.22 (2.2)2 0.2 (0 .2 ) 1.4 0.1 (2.5)

Government asset protection scheme

ee - APS CDS - FV changes0.6 0.3

Change in FV o equity conversion

notes 0.2 0.2 (0.2)

Proft on debt buy back and

extinguishments

(1.1) (0 . 6) ( 0.3 ) (0.2) (1.3)

(Gain) / loss on sale or acquisition

o businesses0.1 (2.7) (0.2) (0.3)

Changes to pension scheme ( 0 .3 ) (0 .4 )sVolatility in insurance business 0.2 0.7

Strategic disposals ( 0 .2 ) (0.1)(Gain) / loss on sale o investment in

.BlackRock, Inc ( 0 .3 ) 0.1

Impairment on investment in

BlackRock, Inc. 1.8

Goodwill impairment 0.6Proft / (loss) beore tax and

notable items4 .5 3.8 2.2 1 .8 1.7 (0.6) 1 .1 1.0 (0.3) 8.4 7.4 4.6 2.5 2.3 2.0

1. Relates to all customer redress where PPI is not disclosed separately.

2. (Gain) / loss on revaluation of own debt comprised both fair value of own debt attributable to own credit and own credit adjustments on derivatives.




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excluding the impact

o notable items,

each bank perormedbetter than the

comparable period

in 2011.

The key themes are:

The statutory results are mixed between the ve banks; however, when excluding the

impact o notable items, each bank perormed better than the comparable period in

2011.

Regulatory and litigation charges continue to impact the UK banking market. The total

charges taken during the rst six months o 2012 amounted to 3.8 billion o which

2.3 billion relates to PPI.

Fair value o own debt (FVOD) continues to create volatility in the statutory results o

our o the ve banks. For H1 2012, the FVOD adversely aected the protability o those

banks.

Except or Standard Chartered, cost reductions (excluding notable items) continue tobe a priority and a means to improve protability. Although the other our institutions

have been successul, cost to income ratios or those institutions have remained fat or

deterioratedduetoshrinkingprotmarginsand/orreductioninnon-interestrevenuesdriven by economic actors or asset disposals.

On a statutory basis, HSBC, Standard Chartered and Lloyds have shown improved results

despite Lloyds still reporting a statutory loss. Barclays prots have declined and losses at

RBS have increased.

Barclays core prot beore tax increased 22 percent to 4.5 billion. Results have been

signicantly aected by the adverse impact o 2.9 billion relating to air value movements

in own debt, compared to a gain o 89 million in the prior year.

Barclayshasalsorecognisedadditionalprovisionsof300millionrelatingtomis-sellingofPayment Protection Insurance (PPI), 450 million in respect o interest rate swap redress

onsalestosmallandmedium-sizedbusinesses,and290millionrelatedtoregulatorypenalties rom the investigation into the setting o interbank oered rate.

For Lloyds, a statutory loss beore tax o 439 million refects additional PPI provisions o

1.1 billion, coupled with simplication charges o 274 million (relating to severance,

IT and other business costs) and costs in respect o the EC mandated retail business

disposaltoTheCo-operativeGroupof239million.Thegroupsunderlyingprotshavebeen driven largely by reduced costs rather than increased income mostly rom

simplication savings as well as substantially lower impairment refecting urther asset

quality improvements and a strong credit risk management approach.

HSBCs reported prot beore tax o $12.7 billion (8.1 billion) was $1.3 billion higher than

in the rst hal o 2011. This included $4.3 billion o gains rom the disposal o businesses,

most notably rom the sale o the Card and Retail Services business and the sale o

138non-strategicbranchesintheUS.Theseone-offprotswereoffsetbyfairvaluelosseson own debt o $2.2 billion, and various other charges relating to litigation and regulatory

matters (including customer redress programmes) and restructuring, resulting in a core

protbeforetaxof$13.2billion(8.4billion).Inaddition,H12012observedanon-recurrence o a pension credit that was recongnised in 2011.

Certain business lines within HSBC continue to experience strong revenue growth in the

emergingmarketsofHongKong,RestofAsia-PacicandLatinAmerica,with73percento prot beore tax arising in these regions.

For Standard Chartered, prot beore tax o $3.9 billion (2.5 billion) was up 9 percent rom

H1 2011. The group continues to ocus on and invest in emerging markets with

approximately 90 percent o prot beore tax originating in Asia, Arica and the Middle

East. Aside rom India, all geographic segments have delivered income growth.




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RBSs statutory loss beore tax increased by 90 percent to 1.5 billion compared with the

priorperiod.One-offcostsincludedanowncreditchargeof3billionandrestructuringandintegration costs o 0.7 billion as RBS continue to reorganise their markets business. The

Retail & Commercial and Markets businesses suered in the weak economy due to low

interest rates and weakness in currencies, credit markets and investor products.

Net interest margin

With interest rates at a historic low in the UK and most o the Western economies, banks

continue to ace intense pressure on liability margins with strong competition or deposits

in order to reduce or replace wholesale unding. In the rst hal o 2012, reductions in net

interest margins have been observed in most instances.

For the rst six months o 2012 Lloyds experienced a signicant decrease in net interest

income (18 percent to 5.2 billion) refecting a 19bps reduction in net interest margin on an

underlying basis. Contributing to the decrease in net interest income is the decline inassets,reectingLloydsstrategytoreducenon-coreassets,andtheweakereconomicenvironment aecting customer demand or credit.

Barclays net interest income remained more or less constant at 6.1 billion compared to

6.2 billion; however, the group similarly experienced a reduction in the net interest margin

rom 197bps to 189bps, as a result o pressure on customer margins and reduction in

benets rom the groups structural interest rate hedging activities.

HSBCs reported net interest income was $19.4 billion, a 4 percent decline on prior year.

Net interest margin also ell by 17bps to 237bps. This was attributable to lower yields on

excess liquidity and customer lending partly oset by a reduction in the cost o unds on

customer accounts. On an underlying basis, ater adjusting or oreign currency

movements and the sales o the US Credit and Retail Services portolio, net interest

income increased 3 percent.

Standard Chartered reported $542 million growth in net interest income primarily driven by

volume, however net interest margin remained fat at 230bps as widening liability margins

were oset by compression in asset margins.

RBSs net interest income decreased 8.5 percent to 6 billion compared to the prior year.

RBSs net interest margin declined by 8bps to 192bps, largely refecting the cost o

precautionary liquidity and unding strategies adopted in the latter part o 2011.

Non-interest income

Non-interestincomecomprisesnettradingrevenues,feeincomederivedfromvariousservices including unds management, net insurance revenues and net income romnancial instruments designated at air value. For the rst six months o 2012, the banks

experienced mixed results as markets became signicantly more volatile rom April 2012

onwards reducing customer demand and income on trading products.

A strong perormance by Barclays investment bank was the primary cause o the

6 percentincreaseinBarclaysnon-interestincome(beforetheimpactofgainsorlossesonown credit), largely due to improved perormances in interest rate and commodity

products.

Other income at Lloyds decreased by 14 percent to 4.3 billion compared to 4.9 billion at

H12011onanunderlyingbasis.Thesubduedeconomicenvironment,run-offofnon-coreassetsanddecliningdemandhasresultedinreducedincomefromnon-lendingactivitiesand unds management.

HSBC experienced a decrease in both ee and trading income. Net ee income ell by

6 percent to $8.3 billion. This is primarily attributable to the sale o the Card and Retail




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Despite the

economicuncertainty,

impairment charges

have remained

historically low in

domestic markets

Services business, and net trading income ell by 6 percent to $4.5 billion primarily due

tonon-favourablefairvaluemovementsoneconomicandnon-qualifying(foraccountingpurposes) hedges in addition to lower average holdings and associated yields on debt

securities held or trading.

StandardCharteredreporteda5percentincreaseinnon-interestincometo$4billion.Growth was driven by trading income in particular through gains on interest rate products

and investment securities. Other operating income also contributed to the increase in

non-interestincomethroughhigherrealisationsonavailableforsalesecuritiesandincreased income rom operating leases on aircrat and ships.

ForRBS,non-interestincomedecreased19percentfrom9.4billioninH12011to7.6billionforH12012.ThisreectslowergainsinNon-coreandlowernon-interestincomeinMarkets as investor condence waned; lower client activity levels in international banking

and lower card transaction volumes, as well as the impact o the exit o certain businesslines in the insurance business.

Impairment provisions

Despite the economic uncertainty, impairment charges have remained historically low in

domestic markets, although growth in emerging markets or Standard Chartered and

HSBC led to additional charges in some instances. For RBS, Lloyds, and HSBC (within

established markets e.g. North America), current year and prior period asset disposals,

includingportfoliorun-off,arereducingimpairmentchargesandtherebyfavourablyimpacting the bottom line.

Barclays recorded impairment charges o 1.8 billion which was in line with the prior period

charge. Underpinning this was mixed portolio perormance as improved delinquency

trends in cards portolios and UK unsecured lending were oset by deterioration in home

loans in Europe and South Arica. Barclays also recognised additional impairment charges

on Asset Backed Security (ABS) positions during 2012.

HSBCs loan impairment charges and other credit risk provisions decreased rom

$5.3 billion to $4.8 billion, a decline o 9 percent compared with the rst hal o 2011. This

refected decreases in North America ollowing the decline in lending balances and the

less pronounced eects o the delays in oreclosure processing in the US CML portolio,

the sale o the Card and Retail Services portolio as well as increased ocus on higher

quality RBWM assets in the UK. This was partly oset by higher delinquency rates in Brazil

together with a rise in individually assessed loan impairment charges and an impairment o

available or sale debt securities in the rest o Asia Pacic. For Standard Chartered, a small

number o large exposures in India and the UAE along with selective growth in unsecuredlending caused an increase in loan impairments rom $412 million or H1 2011 to

$583 million or H1 2012.

Lloyds impairment charges declined by 39 percent compared with prior period to

2.7 billion, on a statutory basis, refecting the risk prole o new business ollowing a

portolio reshaping. In addition, application o prudential risk appetite and stronger risk

management controls contributed to a decline in impairment during 2012. Similarly,

impairment losses at RBS were down 37 percent on the prior year at 2.6 billion.

Favourable trends were noted in the UK and US retail businesses, along with a signicant

reduction in impairment charges related to the Ulster Bank portolio.

Costs

With the challenging economic environment, market conditions and increased cost o

regulation, banks continue to employ cost control measures to mitigate these actors. The

need or this has been heightened in the rst hal o 2012 ollowing increased regulatory

and litigation costs, including PPI. There is continued emphasis to maintain cost to income




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ratios by the majority o the banks. While costs have declined or fouro the fivebanks, the cost

to income ratios or the majority o those banks has increased as a result o pressures on

the revenue side o the equation.

Aside rom Standard Chartered who continue to manage costs tightly while remaining

invested, each o the banks has taken action to reduce their employee costs and

implement cost reduction programmes. For HSBC, strategies have also been

implemented to increase market share in specic regions and lines o business.

Excluding the impact o PPI and interest rate hedging products, costs or Barclays were

down 3 percent on prior year to 9.5 billion. The reduction principally relates to a 10 percent

decrease in total sta costs, partially oset by higher regulatory costs (including the

regulatory penalties o 290 million relating to the investigation into the setting o interbank

oered rates) and a deerred bonus charge. On a statutory basis, Barclays cost to income

ratio compared to the prior year comparative period has increased by 9.7 percent to80.3 percent.

Excluding the impact o PPI, Lloyds operating costs decreased rom 6.4 billion in H1 2011

to 5.6 billion in H1 2012 on a statutory basis. This is partly attributable to savings rom their

simplication programme. Also, contributing to this decrease is a pension past service

credit o 250 million in H1 2012 ollowing a change in the infation index used or certain

pension plans rom RPI to CPI. Other reductions include salaries (down 12 percent),

proessional ees (down 33 percent) and other sta costs (down 19 percent). Lloyds cost

to income ratio has increased slightly rom 48 percent in the prior period to 54.3 percent in

the current period.

On an underlying basis, HSBCs costs have decreased marginally excluding the impact

o various notable items. This refects the impact o HSBCs sustainable cost saving

initiatives, which have delivered $0.8 billion o savings in 2012. This was oset by the

impacts o wage infation, investment in compliance inrastructure and business

expansion projects. On a reported basis, cost to income ratio remained constant with

2011 at 57.5 percent.

Standard Chartered continues to maintain cost control with the rate o income growth

exceeding the rate o cost growth both on a statutory and core basis. As a result the

normalised cost income ratio improved by 1.7 percent to 52.3 percent.

Excluding the impact o PPI, operating expenses at RBS o 7.9 billion showed a 2 percent

decrease over the prior year. This refects a decrease in sta costs due to restructuring in

themarketsdivisionandlowerrevenue-linkedstaffexpenses.Thecosttoincomeratioincreased rom 56 percent or H1 2011 to 64 percent or H1 2012.Regulation and litigation costs

The regulatory and litigation environment continues to impact the UK banks surveyed.

The emergence o new regulatory misconduct allegations has been a common theme

overthepastfewmonthsaswellasthecontinuedcostsofdealingwithPPIclaims- PPIcompensation and remediation costs once again constituted a signicant hit or most

banks, with total provisions o 2.3 billion taken by the banks during the rst hal o 2012,

in addition to the 5.7 billion taken in 2011.

Additionally, Barclays reached settlement with the FSA and US authorities during 2012

regarding investigations into submissions made by Barclays to the bodies that set various

interbank oered rates, resulting in penalties o 290 million. Lloyds, HSBC and RBS have

also reported that they have been complying with demands or inormation; however, no

prediction o the outcome o these investigations has been made.




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HSBC has recognised a provision o $237 million relating to redress in respect o the

possiblemis-sellingofinterestratederivativesintheUK.Similarly,Barclayshasrecognised a provision on the same grounds o 450 million while Lloyds have stated that

any redress is expected to be immaterial. RBS has provided 50 million or redress it

expectstooffertonon-sophisticatedcustomerswhoweresoldstructuredcollars.HSBC recognised a provision or $700 million which refected the best estimate o the

aggregate amount o nes and penalties that are likely to be imposed in connection with

USBankSecrecyAct(BSA)andanti-moneylaundering(AML)complianceandcompliancewith OFAC sanctions.

Costs or bank levies, both the UK bank levy and the Financial Services Compensation

Scheme, will be borne in the second hal o 2012. Based on the charges observed rom

2011, this cost may be material or all banks other than Standard Chartered.

Tax

The tax charge o each group continues to vary based on the diering circumstances and

operatinglocations,witheffectivetaxratesvaryingfrom-46percentto36.8percent.Barclays eective tax rate or H1 2012 was 36.8 percent compared to 25 percent in the

prior year. This is primarily attributable to the recognition o deerred tax assets in 2011 that

had not been previously recognised, coupled with taxes recorded on earnings generated

inhigh-taxedjurisdictions.Despite recording a statutory loss beore tax, Lloyds has incurred a tax charge or the year

o 202 million. This refects the reduction in net deerred tax assets ollowing the

governments announced decrease in the UK tax rate (decrease o 120 million).

The eective tax rate or HSBC was 28.5 percent at H1 2012 compared with 14.9 percent

in the prior year. The prior year rate benetted rom the recognition o deerred tax assets in

respect o US oreign tax credits whilst, in 2012, the gain on the sale o HSBCs US branch

network and the Card and Retail Services business resulted in higher taxable prots. In

addition,HSBCincurrednon-deductibleexpensesrelatedtoUSregulatorymatters.Standard Chartered reported a 1.9 percent reduction in its eective tax rate, rom

28.4 percent or H1 2011 to 26.5 percent in H1 2012, refecting changes in the prot mix.

RBShasrecordedataxchargeof429milliondespiteapre-taxlossof1.5billion(aneffectivetaxrateof-28.5percent).Thisreectsprotsinhightaxregimes(principallytheUS), losses in low tax regimes (principally Ireland) and losses where deerred tax assetshave not been recognised.




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4. Economic outlook

2012 started with

relatively high hopes

but the world

economy has since

deteriorated and

what was an already

sluggish recovery is

showing renewed

signs o weakness.

Global outlook

The nancial crisis o 2008 continues to cast a long shadow in many advanced

economiesoutputremainswellbelowpre-recessionlevelsandprospectsfor2013are shrouded in uncertainty. 2012 started with relatively high hopes but the world

economy has since deteriorated and what was an already sluggish recovery is

showing renewed signs o weakness. The IMF continues to expect world growth o

3.5 percent this year and 3.9 percent next, but the preponderance and severity o

downside risks has markedly increased. Failure to resolve the eurozone crisis,

slower than expected growth in the emerging markets or the looming scal cli in

the US could each derail the already poor recovery.

GDP % 2011 2012 (orecast) 2013 (orecast)

World 3.9 3.5 3.9

Advanced 1.6 1.4 1.9

Emerging 6.2 5.6 5.9

Eurozone 1.5 -0.3 0.7US 1.7 2.0 2.3

Japan -0.7 2.4 1.5UK 0.7 0.2 1.4

China 9.2 8.0 8.5

India 7.1 6.1 6.5

Eurozone crisis

The situation in Europe remains precarious a resolution o the crisis is not only

crucial or the region but more generally or the rest o the world. Ominously, the

crisis has seemingly spread to larger economies as bond yields in Italy and Spain

irtwithunsustainablelevelsandthoseinperceivedsafe-havensdroptorecordlows. And the real economy is now suering too even in the core, most countries

areforecasttoenterrecessionin2012.TheIMFexpectstheeuro-areaasawholeto shrink by 0.3 percent this year and grow just 0.7 percent next year.

Therewillbecallsformorebailoutsandausteritymeasuresintheshort-termbutany lasting solution to the crisis must address two undamental imbalances: rst,

high levels o indebtedness in the peripheral economies and, secondly, their relative

loss o competitiveness.

The current medicine is proving dicult to administer and anyway risks being

counter-productive. Austeritymeasuresarekillinggrowthandconsequentlyfailingto reduce decits as planned; and, even i achievable, cuts in wages to restore

competitiveness will reduce capacity to service debt.


15/24


There appears to be three ways by which the crisis can end:

First, by debt mutualisation. But such a scal union would also require political and

banking union on which it is dicult to reach agreement. Moreover, it would not

directly address competitiveness issues and so would entail ongoing scal

transers.

Second, the northern bloc could pursue refationary policies to give the peripheral

economies a chance to grow their way out o their scal straightjackets through

exports. But it would require Germany and other northern countries to also

engineer higher domestic infation to erode their own competitiveness.

The third, and only, alternative ending is disorderly deault by one or morecountries, probably accompanied by exit rom the euro and a currency devaluation

to restore competitiveness. The practical complications would be horrendous:

preparations or a new currency, capital controls, recapitalisation o banking

systems and rewriting o contracts would have to be conducted in secret. And to

preventcross-borderpanicandcontagion,rewallswouldneedtobebuiltinadvance.Ofcourseno-onereallyknowswhatthelargerknock-oneffectsandconsequences would be, not just or the eurozone but also or the rest o the world

butthefalloutwouldcertainlybehugelydisruptiveintheshort-term.With all three choices politically dicult and economically risky, Europe has adopteda de acto policy o muddling through. This could continue or some time. But

ultimatelyachoicewillhavetobemade-ortheriskisonewillbeforcedonEuropeby the nancial markets. In the meantime the real economies o most member

states look set to continue to stagnate.




16/24


US fscal cli

Ater a relatively bright start to the year, the US economy is struggling to retain its

momentum. Employment growth has slowed markedly and unemployment remains

stuck at around 8 percent. Tight borrowing conditions or households and rms, the

impact o the eurozone crisis and uncertainty over scal policy continue to act as

headwinds. Growth is expected to continue at just a modest pace through this year

beore picking up gradually in 2013.

Last year US politicians grappled with the debt ceiling. At the 11th hour, a deal was

done but US sovereign debt was downgraded and the shambles did nothing to

engender aith in policymakers. This year the threat o the scal cli looms large.

I no action is taken in Congress, mandatory budget cuts o $600bn will be

implementednextyear.Themeasures- madeupoftaxrisesandspendingcuts-represent around 4 percent o US GDP. Politicians must come up with a credible plan

toaddresslong-termdebtdynamics,butitisdifculttoseehowsuchadramaticscalsqueezeintheshort-termwouldnotsendtheUSbackintorecession.Thisyearisanelection year though and it is possible that the administration will pull something out

o the bag. I not, 2013 is looking very uncertain indeed.

UK

A negative rst hal o 2012 conrmed that the UK had entered a double dip

recession. Economic data since has been distorted by the Jubilee holiday and

Olympics, so amongst all the noise it will be dicult to ascertain the underlying state

o the economy. Yet the big picture is that output has been essentially fat or the

pasttwoyearsandremainssome4percentbelowpre-recessionlevels.Amidst the continued weakness, the IMF has revised down its UK orecasts or this

year and next to just 0.2 percent and 1.4 percent respectively. There seems little to

lit the economy in the short term. Austerity measures have a long way to go or

whilst the planned tax rises have been largely implemented, the majority o

spending cuts are still to come. Households, too, are constrained against a backdrop

o negative real wage growth, high debt and elevated unemployment. Such actors

sap demand and it is unclear the economy will get the required boost rom exports

and investment as trade partners struggle and businesses remain reluctant to

spend.

The latest tranche o Quantitative Easing (QE) and the launch o Government backed

schemes such as the UK Guarantees and Lending Programme and the National Loan

Guarantee Scheme refect policymakers concern that the economy is stuck in the

middle o a renewed downward lurch. Further QE should provide some boost by

holding down borrowing rates but it is no silver bullet. Indeed, more imaginative

monetarypolicies- andperhapsevenasignicantscalstimulus- mayberequiredto counteract the contractionary orces which are now gripping the economy.

More positively, as UK infation tumbles, households real incomes will start to

increaseagain.Butthethreatofanescalationofthecrisisintheeurozoneandonlyslow progress in rebalancing the economy mean the recovery will remain ragile or

some time.




17/24


The emerging markets

The pace o growth in many emerging economies has slowed as a number o

domesticchallengesco-existagainstthebackdropoftroublesintheWest.Fallingproperty prices and concerns over its export markets have led to ears that China is

facingahard-landingyetsuchworriesappeartohavebeenoverdone.The authorities have shown a willingness to use scal and monetary tools and the

IMF orecasts a still healthy 8 percent and 8.5 percent growth rate in 2012 and 2013

respectively. Longer term challenges remain, though specically how to continue

toincreaseoutputwhilstswitchingfrominvestment-ledgrowthtoaconsumptionbased model.

Data rom India is less reassuring. Expansion has slowed rapidly as infation

remains stubbornly high and a dicult business environment discourages

investment. But whilst growth has slowed, it has not stalled and the IMF still

expects India, and the emerging markets more generally, to remain the motors

o world growth.




18/24




4. Banking outlook

Every major bank is struggling to deliver a sustainable and proftable

business model.At present, retail banking resembles a regulated utility,but without the shareholder returns seen in the telecoms and energy

sectors.The challenge acing banks is to plot a route back to strongand long-term proftability as they wrestle with the impact o more

onerous regulation. Meanwhile, the latest series o incidents and ailures

means that restoring customers eroded trust in banks remains a

distant prospect.

New pressures

In response to the nancial crisis, regulators around the world have come up with a

demanding regulatory agenda that banks must work to over the next ve to seven

years. This includes the new Basel requirements, recovery and resolution planning

(RRP) and the Independent Commission on Bankings (ICB) ringencing proposals.

In recent months, our major issues have emerged that suggest a new wave o

regulation may be about to hit banks. These issues comprise:

1 The Libor scandal, with many banks yet to reach agreement with the regulators

on their role in the reported manipulation o the Libor market.

2 Mis-sellingofderivativeproductstosmallerbusinesses,promptingtheFinancial Services Authority (FSA) to launch a major investigation.3 Major systems ailures at Royal Bank o Scotland, which prevented many

customers rom executing transactions or a number o days.

4 ApublicapologybyHSBCregardinganti-moneylaunderingcontroldeciencies at the bank, particularly between Mexico and the United States.It is too early to say whether urther regulation will be put in place as a result o

these our issues. However, a ull Parliamentary enquiry has been announced,

which is likely to produce more than a simple tidying up o existing rules.

RRP and ICB

Banks are nalising strategies to meet their recovery and resolution planning

requirements and comply with the ringencing ramework put orward by

the ICB.

For institutions such as Lloyds where the majority o its business will all within

the ringence the impact will be relatively small. For other institutions with larger

investment banking operations ringencing presents a real challenge, as they seek

to maintain unding and an acceptable return above weighted average cost o

capital on both sides o the divide. The cost o policing the ringence will also be

heavy, both or regulators and, more particularly, the banks themselves.
http:///reader/full/model.Athttp:///reader/full/model.Athttp:///reader/full/model.Athttp:///reader/full/model.At


19/24


Business model

Banks are struggling to optimise the allocation o capital and liquidity to dierent

business operations as they strive to achieve returns above their weighted average

cost o capital. To this end, every bank is reassessing its role and specialisation within

the banking value chain, both domestically and globally. All rms have reviewed their

businessportfoliosand,whereappropriate,areengagedinsellingnon-coreassetsandbusinesses. However, restructuring conditions are dicult, in part because ew banks

are acquisitive in the current climate.

For UK banks, one benecial consequence o the Eurozone crisis has been a substantial

infow o unds rom southern Europe, producing a marked improvement in deposit toloan ratios. The real question is how stable those unds will be as the Eurozone crisis

continues, and how banks can utilise the unds protably.

Product proftability

Many retail banking products exist in an environment characterised by considerable

cross-subsidy.Mis-selling

Personal lending has become more o a commodity product over the past decade

as a result, in part, o the requirement to publish annual percentage rates (APR).

Banks have only been able to generate an acceptable return or shareholders on

thebackofcross-subsidisationbyPaymentProtectionInsurance(PPI).ThePPImis-sellingthatresultedthoughhasexactedapainfultollonbankprotabilityoverthe last 18 months.

With conduct risk developing into a major cost and reputational issue or

institutionsonbothsidesoftheAtlantic,banksneedtofuture-proofproductsandtheirsalesapproachfromtheconsiderablerisksthatmis-sellingremediationpresents. With this in mind, banks are placing great emphasis on the creation o

consumerandsmallandmedium-sizedenterprise(SME)productsthataresuitableor customers and oer a benecial outcome. Nevertheless, it is easier to aspire to

this goal than it is to design products able to produce a good result or customers

in all circumstances.

Free banking

Freebankinglikewiseinvolvesconsiderablecross-subsidisation,withmoreafuentcustomers being subsidised by those who struggle to maintain accounts in credit,

thereby incurring charges.

From the comments o FSA chairman Adair Turner and the Bank o Englands

Andrew Bailey, it is clear regulators would preer an end to ree banking. However,

there is a major disincentive to being the rst institution to introduce charges or

money-transmissionaccounts,asitwouldinducecompetitorstodonothingforseveralmonthsinabidtocapturetheoutowofcustomersfromtherst-moverbank. So while the end o ree banking has seemed ever closer in recent years,

it remains just as dicult to predict the actual trigger or change.




20/24


With customers

becoming more

demanding in this

challenging

environment,

margins are being

compressed

Customer proftability

The traditional customer protability model has been turned on its head. In the past,

most customers o most banks have been unprotable at some point, but over the

course o their lietime have generated an overall prot or their bank. In our changed

world that is no longer the case, with many customers likely to be unprotable through

their lietime.

One example o the change in customer protability is the student population. A

decade ago students became protable customers shortly ater leaving university,

astheywereabletostartwell-paidjobswithlittledebtburden.Bycontrast,thenextgeneration o students will leave university and enter into an uncertain job marketbearing a considerable amount o student debt.

New competition

Banking has always been a business with signicant economies o scale. I anything,

the crisis has increased those scale economies, since the regulatory burden has

introduced signicant xed cost elements. Along with this regulatory burden, poor

current returns in banking are discouraging new entrants rom the technology and

telecoms sectors making a push into the market. Nevertheless, there are emerging

competitive threats arising rom entrants able to leverage new technologies without

being weighed down by legacy systems issues.

Meanwhile, the impact o disruptive technology on the customer oer will beconsiderable or industry incumbents. In response, every bank is investing in upgrading

their internet and mobile propositions to customers.

Costs

BankscontinuetoredesigntheirITarchitectures,adoptingnew,simpleandcost-eective systems. Further investment will likely be spurred by the RBS technology

failure,withanyresultingregulatoryresponseincitingbankstoacceleratethere-engineering o their systems. Ultimately this will result in lower cost systems.

However, the expense o platorm change over the next decade will be considerable.

Also the risks o upgrading legacy systems are considerable. It was reported that the

RBS incident was triggered by a ailed upgrade.

Wealth management

The wealth management industry is at a tipping point as wealth managers ace

a complex series o regulations including the Retail Distribution Review (RDR) at

the same time they are conronted by poor markets which means poorer returns

or clients.

With customers becoming more demanding in this challenging environment,

margins are being compressed, while the rate o increasing costs is outpacing

revenues. In the past, operational ineciency was sometimes covered by charging

higherfees,butthiswillnolongerbepossibleinapost-RDRenvironmentofmoretransparent ee disclosure.




21/24


Meanwhile, independent nancial advisers are beginning to compete eectively or

portolios under 5 million. There is also greater competitive intensity among wealth

managers targeting the very limited number o clients with more than 5 million in

investable unds.

The upshot o this combination o pressures is that we are beginning to see wealth

managers remodelling their products around what clients value most and pricing

their services accordingly.

Investment banking

Investment banking divisions remain under intense pressure, pummelled by dicultmarketconditionsastheEurozonecrisisdragsonandthelong-termstrategicthreato a hostile regulatory environment.

Inresponse,banksonbothsidesoftheAtlanticremainfocussedoncost-cuttinginitiatives, including bringing down wage bills by reducing headcount and bonuses.

Banks also continue to shrink activity and trading capacity through the winding

down or divestment o business units, especially in those areas that require

signicant capital and liquidity, while striving to leverage opportunities in targeted

growthmarkets.However,withmanyrmsstrugglingtorein-innon-compensationexpenses, more drastic investment bank restructuring programmes may be

necessary i the business climate does not improve markedly in the near term.




22/24


Meanwhile, concern over trader controls rose to the ore in the rst hal o this year.

Thewell-publicisedroguetraderincidentatUBShasbeenfollowedbymassivewrite-offsatJPMorgansLondon-basedChiefInvestmentOfceandongoingrevelationssurroundingtheLibor-xingscandal.Withsomanyareasofactivitynowcomingunder the spotlight, control o trading environments is set to be a major area o

ocus over the coming 12 months.

Economic headwinds

The economic environment remains challenging. The pall o the Eurozone crisis

continues to hang heavy over the UK, and the rest o the world, dampening

enthusiasm or investment and consumer spending.

Provisional data rom the Oce or National Statistics (ONS) reveals the UK economy

shrank 0.7 percent in the second quarter, its third quarter o contraction although

the gure may yet be modied. Prior to the ONS announcement, the International

Monetary Fund (IMF) had already reduced its orecast or UK real GDP growth rom

0.8 percent to 0.2 percent or 2012, but that may need revising downward urther in

light o the sizable second quarter contraction. The IMF projected tepid UK growth o

1.4 percent in 2013.

Worrying signs are evident elsewhere as well. Growth in the US continues to slow,

rom an annualised rate o 3 percent in the ourth quarter o 2011, to 2 percent in the

rst quarter o 2012 and an estimated 1.5 percent in the second quarter. The pace oChinas economic growth also slackened, rom an annualised 8.1 percent in the rst

quarter o 2012 to 7.6 percent in the second, its slowest rate since the rst quarter

o 2009.

For the UK, potential stimulus levers are limited given the Eurozone crisis and the

countrys debt burden. The eectiveness o quantitative easing is being called into

question increasingly with each additional stimulus, while the impact on savers and

pensioners is generating signicant adverse comment. At the same time, banks

are deleveraging at the astest rate or decades. Despite low interest rates, this

means the prospects or investment are limited.




23/24 2012 KPMG LLP, a UK limited liabil ity partnership, is a subsidiary o KPMG Europe LLP and a member rm o the KPMG



24/24

To discuss your challenges or any o the themes in this report, contact us:

Bill Michael

UK Head of Financial Services

T: +44 (0) 207 311 5292

E: [email protected]

David SayerGlobal Head of Banking

T: +44 (0) 207 311 5404


John Hughes

UK Head of Banking

T: +44 (0) 207 311 5693


Richard McCarthy

UK Head of Capital Markets

T: +44 (0) 207 694 2785


The ollowing people made signicant contributions to this publication:

Editor: Jon Bingham

Sub-Editors: Michael Braunstein and Sid Welham

Contributors and/or analysis: Monica Fiumara, Mehreen Khalid, Dina Modha

and Alice Pettersen

www.kpmg.co.uk/banking

To provide eedback

E:[email protected]

The inormation contained herein is o a general nature and is not intended to address the circumstances o any particular

individual or entity. Although we endeavour to provide accurate and timely inormation, there can be no guarantee that such

inormation is accurate as o the date it is received or that it will continue to be accurate in the uture. No one should act on

such inormation without appropriate proessional advice ater a thorough examination o the particular situation.


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Documents

Uk Banks Performance Benchmarking Report Hy 2012