The major lenders saved the worst until last. The final of the big five UK banks to report its third-quarter earnings, Standard Chartered (STAN), dropped a clanger. The emerging markets-focused lender announced a £3.3bn rights issue, scrapped its 2015 final dividend and set a return on equity target of just 8 per cent to be achieved by 2018, rising to 10 per cent by 2020. These were enough to send its share price down 7 per cent on the day.
The story has become clearer. Standard Chartered enjoyed a decade of growth in emerging markets, which have come under pressure of late and have now contributed to more of its loans turning ugly. Impairments of $1.2bn (£0.78bn) over the period compare with $536m in the third quarter of the previous financial year. Like other institutions, it had also expanded its universal banking services - retail and investment banking and wealth management - into areas now too expensive to run. A more selective approach to business and a move to reduce its risk-weighted assets helps to explain why income from corporate and institutional clients was down by 18 per cent year on year to $2.1bn.
New boss Bill Winters wants to focus on affluent retail clients instead of investment banking, as well as reform capital-intensive businesses, and accept restructuring charges, redundancy costs and goodwill writedowns amounting to $3bn by the end of 2016. But investors will ask whether the capital raised will be enough, how management can reduce the turnover decline and whether higher loan loss provisions are in the pipeline. Argonaut Capital's Barry Norris said shareholders should be prepared for profits being weighed down by "abnormally high provision charges" for the next few years.
StanChart's kitchen sink was just the latest in the pile thrown out by European banks, following Deutsche Bank's (Ger:DBK) decision to scrap its dividend for the next two years, cut thousands of jobs and reduce the number of countries within which it operates. At this month's FT Banking Summit 2015, speaker after speaker bemoaned European banks' lost ground to their US counterparts - partly due to a slow-moving regulatory environment.
Former head of the Swiss central bank Philipp Hildebrand, now vice-chairman at BlackRock, discussed how major banks were increasingly moving from investment to wealth management in pursuit of returns that have a low cost of capital. He said to the conference: "As economists, can we really assume that the current wealth management margins will persist in such an environment of lots of new entrants into this business? In their aggregate, banks will better serve the varied needs of the real economy if they have diversified business models, with diversified offerings of services."
The lack of direction for the sector is epitomised by Barclays (BARC) as shareholders remain unsure how new chief executive Jes Staley will change his predecessor's strategy and stomach £1bn of structural reform costs. At Royal Bank of Scotland (RBS), the line of travel is clearer, but it faces a similar challenge to Standard Chartered in tackling falling operating income while reducing its investment bank.
HSBC (HSBA) was also hit with lower income from its credit and rates trading in investment banking, lower UK overdraft fees and reduced revenue in its core Hong Kong market. The company's head of UK and continental Europe, António Simões, also spoke at the summit, making the strongest defence of the universal banking model, saying it is necessary to fully serve growing corporate clients which need a lender with a global reach. Indeed, Mr Simões was also comfortable the group would be able to cross-sell investment banking services through the ringfence to its retail bank customers. But the UK lenders may need more than an accommodating regulator to repair their revenue streams.
