The last few years have not been easy for Britain’s financial giants, many of which are among the largest FX dealers in the world.
Lloyds Banking Group PLC (LON:LLOY), Barclays PLC (LON:BARC), HSBC Holdings plc (LON:HSBA), Royal Bank of Scotland and Standard Chartered have been plagued by numerous extremely costly events which began in 2008 and 2009 when the financial crisis hit hard, resulting in the near failure of the majority of Britain’s banks, and the subsequent nationalization.
Since then, Britain’s regulatory authorities arose from their decade-long slumber, aware that in retrospect, many of the woes could have been avoided by implementing checks and balances on retail lending, the core business of many UK banks, therefore by the end of last year, the size of the penalties administered to six banks by the Financial Conduct Authority for their part in the FX rate manipulation case were astronomical, hitting profits hard at a time when business was at a low point.
The effect on profits that have ensued from the lull in market interbank market activity last year plus the $4.3 billion collective fine imposed on six banks, plus litigation costs for class action law suits has attracted the attention of multinational auditing and professional services company KPMG L.L.P. which has stated that Britain’s five largest banks must “urgently tackle” low returns for shareholders and work harder to become more profitable.
When adding this to the payment protection insurance mis-selling case against banks as well as censuring for the handling of interest rate hedging products, the total penalties equated to £9.9 billion.
According to the Financial Times, none of the banks achieved a return on equity above 8% last year, compared with an average of 11.6% in 2009, which is remarkable when considering that the entire nation was in the middle of a financial crisis.
KPMG said a boost to returns requires “radical use” of new technologies, such as digital services, to deliver more customer value while reducing costs, a matter which the incumbent Chancellor of the Exchequer George Osborne is aligned with as he wishes to encourage the development of new financial technologies in London.
Bill Michael, head of financial services at KPMG, said in a report by the Financial Times that banks are “undergoing a once-in-a-lifetime change”, as they face evolving regulation, technology and society’s expectations.
“At the same time, competition is increasing as new challenger banks and peer-to-peer platforms offer customers new ways to borrow and deposit and technology-led services such as PayPal and e-wallets change the way money is transferred and goods and services paid for,” he said.
KPMG further asserts that these challenges arrived at a time during which major banks are being held to greater account for their conduct and face cost pressures under tighter regulation.
The Financial Times report states that banks that hold at least £25 billion of deposits will be forced to ringfence their retail operations by 2019, for example, in an attempt to protect customers from investment banking crashes.
A recent report by S&P, a credit-rating agency, said that the “significant” resources and management time needed to implement ringfencing will incur costs that could be charged back to customers. Douglas Flint, HSBC Chairman, last year told a House of Lords committee that he expected the UK ringfencing requirement to cost the bank £1bn to £2bn.
Costs remain high on banks’ agenda, with all the lenders undertaking “optimisation” programmes. Cost-to-income ratios ranged from 51 per cent to as high as 87 per cent, the report showed, However, the charges for misconduct still weigh on the banks. The five lenders accrued a £39bn bill to pay for wrongdoings during the past three years, amounting to about two-thirds of combined profits.