A new report on banking spells out how the profits of Britain's largest banks have suffered at the hands of the eurozone crisis, payments for mis-sold payment protection insurance, the bank levy and new regulatory requirements.
Unfortunately, while you may smirk at their misfortunes, any mirth is likely to be short-lived, as the banks' woes are expected to translate into higher charges for personal customers. Forced to hold more capital, the banks will also lend less, and they are expected to lay off more people.
The report from KPMG paints a gloomy picture. It puts the overall cost of PPI and other redress payments at £5.7 billion, while the total bank levy charge was £1.3 billion.
The big five banks – Barclays, HSBC, Lloyds Banking Group, Royal Bank of Scotland and Standard Chartered – made combined pre-tax profits of £19.4 billion in 2011, down 10% on the profits reported the previous year. PPI compensation payments punctured a £3.2 billion hole in Lloyds' results and pushed the bank, the biggest seller of the controversial insurance, into the red. Meanwhile RBS suffered a £1.3 billion loss on its Greek government debt holdings.
After a year of aggressive cost cutting and restructuring, including the offloading of non-core businesses, retail banking fared better than investment banking where revenues slumped.
Bill Michael, UK head of financial services at KPMG, said: "It was a tougher year than many expected and banks will need to continue working hard to turn things around. I expect we will see continued cost costing – which inevitably means further job losses – and business models will be reviewed again to ensure banks are concentrating on their core strengths and the markets with the greatest potential."
The banks with larger exposures to Asian economies were the star performers, which underlines how the UK and Europe are becoming relatively difficult places for banks to do business. HSBC, which has nearly half of its business based in Asia and Latin America, and Standard Chartered, with 80% of its business in Asia and the Middle East, outperformed the more UK and US focused banks. As the amount of capital and liquidity required to write business in the UK becomes higher than in other jurisdictions, it is becoming harder for banks without an international focus to achieve the return on equity expected by investors.
Michael added: "The UK bank levy knocked a significant dent in the profitability of all banks and PPI and other customer redress had an even more significant impact. In addition, the cost of regulation is starting to bite and this will not ease off anytime soon, especially as work on implementing the Independent Commission on Banking recommendations and recovery and resolution plans heats up. Add to the mix the fact that UK banks will soon be facing a new look regulatory regime presenting the significant challenge of managing a dual regulatory relationship with both the prudential and conduct supervisors."
He called for banks to change their business models and remuneration levels for staff to meet the increased capital requirements. Banks can improve their capital ratios either by raising capital or deleveraging. At present they are finding it tough to generate capital and it is therefore easier to reduce overall lending.
Britain's banks will have to adapt to a new dual regulatory regime from next spring. The Financial Services Authority will be dismantled and replaced by a new banking supervisory body within the Bank of England, and a new consumer watchdog. That process is by no means smooth as the shock departure of FSA boss Hector Sants, who had been lined up to head up the new banking supervisory body, showed on Friday.
The report shows that banks' bad debts have continued to drop as customers continue to pay down debt, in particular credit card debt and other unsecured balances. However, the worsening house price outlook has had some impact on people falling behind with their mortgage payments. RBS and Lloyds have both signalled they will raise their standard variable rates for mortgage customers.
Michael said: "With interest rates at a historic low in the UK, banks continue to face intense pressure on liability margins with stiff competition for deposits to improve funding. Non-interest income has remained broadly flat compared with 2010. Against this backdrop, future profitability is a key concern for retail banks and I anticipate additional price increases for customers. Further job cuts are also inevitable."
On the plus side, banks are under pressure to simplify their products: reducing the number on offer and streamlining the delivery process.
Mobile banking will be a battleground this year, Michael predicted, and the banks that haven't come up with strategies for smartphones and tablet computers will lose out in the long run. But banks are only just starting to look at social media, even though it's clear that customers will increasingly want to use their mobile phones to transfer money between accounts and make payments.
The investment banking sector has had a year to forget. While 2011 got off to a strong start, the eurozone crisis and financial market turmoil made life hard through the rest of the year. 2012 has also started well and some optimism has returned. The question is will this continue - or will we see a repeat of last year's performance?
Michael said: "The big question for the industry is how it will consistently generate a return on equity above the average cost of capital. This is a very tough ask in the current environment and the challenge for management will be to continue driving down costs to match reduced revenue levels."