UK banks need to work harder on profitability, study finds

Britain's five largest banking groups must "urgently tackle" low returns for shareholders and work harder to become more profitable, accountancy firm KPMG has warned.

Its annual UK bank benchmarking report, which covers Lloyds, Barclays, HSBC, Royal Bank of Scotland and Standard Chartered, found that value for shareholders is still being eroded six years after the crisis.

None of the banks achieved a return on equity above 8 per cent last year, compared with an average of 11.6 per cent in 2009.

KPMG said a boost to returns requires "radical use" of new technologies, such as digital services, to deliver more customer value while reducing costs.

Bill Michael, head of financial services at KPMG, said 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.

But the accountancy firm noted that these challenges come as major banks are being held to greater account for their conduct and face cost pressures under tighter regulation.

Banks that hold at least £25bn 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.

Conduct costs reached £9.9bn last year, of which half relates to payment protection insurance mis-selling and interest rate hedging products.

The total cost was only 8 per cent down on 2013 and 19 per cent on 2012, KPMG said.

Banks in the UK have so far set aside more than £24bn to cover PPI compensation and charges in one of the largest financial mis-selling scandals in the past two decades.

The Financial Conduct Authority recently proposed a deadline for complaints about PPI as part of a wider review into how lenders handle customers' claims.

Conversely, costs for loan impairments have fallen by 72 per cent, from £18.7bn in 2013 to £5.2bn in 2014, due to strengthening economic conditions.

Of the five banks, only Standard Chartered, which is listed in London but focuses on lending in the emerging markets, failed to see an improvement, the report said.

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