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Banks must address low equity return, urges KPMG

BRITAIN’S BIGGEST BANKS must urgently tackle a low return on equity.

That’s the clarion call from KPMG in its latest bank benchmarking report, A Paradox of Forces, which studied the full-year results of the five biggest UK-based banks. 

The firm found that while their combined pre-tax profits hit £20.6bn in 2014, up £7.9bn or 62% from £12.7bn the previous year. This was achieved despite income falling by 12% to £127.2bn, as Barclays, HSBC, Lloyds, RBS and Standard Chartered, focused on less riskier activities.

Pamela McIntyre, head of banking audit at KPMG, said: “The banks are in a period of transition as they adapt their business plans to respond to the shifting regulatory landscape. The long-term outlook is still uncertain, but our report reveals there’s clear evidence of change.

“Banks have reshaped their balance sheets and are on course to meet their targets for capital, leverage and liquidity. The unanimous commitment to improve customer service also featured in the annual reports. However, ultimately one of the key measures of success is return on equity, which is still unsustainably below the banks’ cost of capital.

While total loan impairment costs fell by 72% to £5.2bn at an average of 3.4%, they are still double the pre-crisis levels of 1.6%.

But the report also reveals that customer remediation, conduct failings and fines continue to be a major issue, with costs hitting £38.7bn, over 60% of all their profits since 2011.

Conduct costs last year were £9.9bn, only 8% down from 2013, with nearly half going to cover the cost of Payment Protection Insurance and interest rate hedging.

 

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Justin Moss, Partner, High Wycombe, MHA MacIntyre  Hudson