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LONDON (Alliance News) - The UK's top five banks have become safer over the last five years, but still have work to do to make their balance sheets more resilient, according to a new KPMG report.
According to the report, UK banks' total assets reduced by 25% to GBP5.2 trillion in the five years since 2008, as the banks cut riskier derivatives exposures and reduced risk-weighted assets in response to more stringent capital requirements heralded by new international rules.
Core Tier 1 capital increased by GBP93.00 billion between 2008 and 2013, according to the KPMG report.
The banks have been preparing for Basel III requirements through a combination of traditional capital raising on top of profit retention, complementing that approach with reducing risk-weighted assets, which require more capital backing.
Yet Pamela McIntyre, head of banking audit in the UK, said banks continue to need more capital amidst pressures on returns and margins.
"Banks continue to need more capital, margins continue to compress, returns on equity are still much lower than pre-crisis years and most importantly, costs, fines and penalties for customer redress and misconduct issues continue to dominate the agenda," McIntyre said.
Increasingly stringent capital requirements around the UK regulator's leverage ratio requirements saw Barclays PLC turn to shareholders in a GBP5.8 billion rights issue in 2013, while Lloyds Banking Group PLC has been selling off non-core assets in order to optimise its own balance sheet.
Meanwhile, Royal Bank of Scotland Group PLC is scaling back its riskier investment bank, turning its attention to becoming a UK retail bank.
The report highlighted technology as "mission critical" to the future health of the banks, stating that "significant changes" are required in operating platforms and data analytical capabilities to improve the ability to serve customers, enhance risk management and counter the increasing risks of cyber crime.
"New and improved systems will also help address the need to radically revisit the cost base to deliver customers the products they need, at a price they are willing and able to pay, at a return that meets shareholder demands. These will require a massive level of investment right now, but in the long term, will provide the banks with more efficient, robust and user friendly platforms," KPMG's report said.
But the scale of technological investment required won't have an immediate pay off, prompting KPMG to say that it will cause "a further drag and pressure shareholder returns." According to the report, that will make capital raising "even more challenging."
According to the report, the top UK banks face a real balancing act. "Who's in charge," the report asks, "customers, boards or regulators?"
"The balancing act of driving product innovation for customers that fits within the regulator driven view of suitable products is difficult. This could mean banks will increasingly offer what the regulator allows, rather than what certain customers want or need, thereby reducing flexibility and choice. This could build up real challenges for the future, especially with changing demographics," KPMG said.
By Samuel Agini; samagini@alliancenews.com; @samuelagini
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