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Bills, bills, bills for Big Four

The UK's largest banks face a wave of costs and charges
May 6, 2015

Will 2015 go down as the worst year in history for the UK banking sector? This was the provocative question posed by financial services advisers Kinetic Partners after the publication of a report laying out the tremendous and growing weight of the conduct and litigation costs faced by the Big Four. Although the obvious answer is to point to 2008, there is no ignoring the turbulence building around these systemically crucial lenders, which as a group have undershot the FTSE 100 by 5 percentage points so far this year.

The Standard & Poor’s report said that conduct and litigation charges are now a “way of life” for the major UK banks. The four largest institutions - HSBC (HSBA), Lloyds (LLOY), Barclays (BARC) and Royal Bank of Scotland (RBS) - bore £42bn in conduct and litigation charges over the five years to 2014. That equates to roughly 7.5 per cent of their collective revenue over the period. The rating agency projected a further £19bn to be shared between these banks over the next two years.

 

 

Given the volume of misconduct and litigation costs that these companies have already digested, the reception of their first-quarter figures reflected some surprise at the size of the extra provisions set aside. RBS saw its shares fall 3 per cent on the day it announced further litigation and conduct costs of £856m, in addition to £453m restructuring costs. Barclays shares fell a more modest 1.7 per cent after it set aside a further £800m in the first quarter for investigations and litigation over foreign exchange trading, as well as an additional £150m in redress for past payment protection insurance business.

In addition, there is the political pressure to squeeze the coffers of the major lenders through an ever-rising bank levy, and to split up their retail and investment banking operations by 2019 in order to protect the customers of the former from the risks taken by the latter.

Investors and politicians alike need look no further than HSBC for the potential impact of this twin attack, with management on record as saying the levy could make its progressive dividend policy impossible. Plus, of course, a decision is now expected within months on whether to move the company’s domicile, in light of the “regulatory and structural reforms” instituted since the financial crisis. The company has also raised the possibility of selling off its UK retail business if the group is not permitted to retain control of its capital or management decisions, once ringfenced.

These headlines were met with a collective thumbs-down from the market, despite the 4 per cent increase in pre-tax profit achieved by the group in the first quarter, driven by an 8 per cent increase in revenue from its investment bank. An improving credit market was reflected in a drop in loan impairment charges, while the group’s retail banking and wealth management increased their revenue.

For those arguing a recovery story, there were even more reasons to be cheerful about Lloyds, which posted underlying profit of £2.1bn in the first quarter, a fifth higher year-on-year. Its impairment charge more than halved, loans and advances to customers - excluding TSB - increased over the period, and the company managed to reduce its costs relative to its income.