Banks find path to profitability blocked

BY Richard Summerfield

Banks across the continent have struggled to achieve profitability since the onset of the financial crisis nearly a decade ago. As the crisis disappears in the rear view mirror, many analysts had hoped that financial institutions would have returned to profitability by now, but as a result of numerous head winds many are still struggling - a situation that appears likely to continue for some time, according to new report from  KPMG.

The firm’s data suggests that banks across the continent will continue to struggle to achieve profitability in the coming years due to higher capital requirements, perpetually low interest rates and the weakness of the local economy.

Marcus Evans, a partner in KPMG’s European Central Bank office, said that European banks were still grappling with low or negative interest rates and mounting capital and regulatory costs. “The successful banks will restructure their balance sheets to minimise the impact of new regulations and reduce their cost‑to‑income ratios through smart use of technology,” he said. “Reversing the profitability of European banks is not a lost cause but it will certainly be a lot of hard work.”

KPMG’s report, 'The Profitability of EU Banks: Hard Work or a Lost Cause?', suggests that Europe’s banks are set to continue to see profitability slip out of reach with the average return on equity across all banks in the EU remaining static at around 3 percent. The cost of capital, however, is considered to be around 10 to 12 percent, according to KPMG.

Regulatory pressure, which has been a notable feature of the global financial market over the last decade, may also be ramped up in the near future. The Basel IV regulations, a more rigorous set of rules, could add almost 0.5 percent to the overall cost of European banks' funding. As Basel IV looms ever closer, the pressure on Europe’s banking sector is only set to increase.

The issue of non-performing loans (NPLs)  is also a major millstone around the neck of European banks. With a total of $1.3 trillion, these NPLs are beginning to weigh heavily and will likely have a detrimental effect on lending ability for the foreseeable future.

Report: The Profitability of EU Banks: Hard Work or a Lost Cause?

RBS agrees $1bn mortgage mis-selling deal

BY Richard Summerfield

Royal Bank of Scotland has agreed to pay $1.1bn to settle a number of legal claims in the US which alleged that the bank mis-sold mortgage securities in the run-up to the financial crisis.

RBS sold the securities to two credit unions, which failed after the US housing bubble burst in 2008. Accordingly, state-backed RBS, which has admitted no fault under the terms of the deal, has struck the settlement with the National Credit Union Administration Board (NCUA), which regulates credit unions.

The deal will see RBS resolve two lawsuits which had been filed in federal courts in California and Kansas by the NCUA, which had been acting as the liquidating agents for two failed credit unions.

Rick Metsger, chairman of the NCUA, said, "NCUA is pleased with today's settlement and fully intends to stay the course in fulfilling its statutory responsibilities to protect the credit union system and to pursue recoveries against financial firms that we maintain contributed to the corporate crisis."

The settlement brings the agency's recoveries against various banks to $4.3bn in lawsuits over their sale of mortgage-backed securities before the 2008 financial crisis.

Though RBS has finalised this deal with the NCUA, it is not yet out of the woods. The settlement with the NCUA board is just one of the three major issues that bank is currently facing regarding its selling practices in the build-up to the financial crisis. The bank must still address suits being brought against it by the Department of Justice and the Federal Housing Finance Agency (FHFA).

According to RBS, the settlement won’t have a material impact on the bank’s core capital ratio given that the $1.1bn payment will be “substantially covered by existing provisions”. In 2015 the bank agreed to pay $129.6m to settle a separate case with the NCUA. Though the most recent settlement will see the NCUA will dismiss its pending civil lawsuits against the bank, RBS is still defending against 15 civil lawsuits in the US, though it has not yet entered formal discussions with the DoJ.

Going forward, the bank is likely to have to pay out considerably more than $1.1bn to the DoJ and FHFA. Indeed, it is believed that ultimately the bank may be forced to pay a total of $13bn. Accordingly, RBS noted that it “may require additional provisions in future periods that in aggregate could be materially in excess of the provisions".

RBS is not alone in drawing the ire of the DoJ, with Deutsche Bank recently fined $14bn for mis-selling mortgage-backed securities.

News: RBS to pay $1.1 billion to resolve some of its U.S. mortgage claims

PM Tsipras seeks “positive completion” of Greece bailout programme

BY Fraser Tennant

Greek prime minister Alexis Tsipras has called for the completion of a review of his country’s bailout programme so that the nation can begin the major task of restoring its struggling economy.  

Mr Tsipras’s call, made during a visit to Thessaloniki where he set out the economic priorities of the Syriza government, followed hot on the heels of a second review of Greece’s bailout programme on 9 September, which found that the Greek government needs to do more to release €2.8bn of funding ($3.1bn).

Specifically, eurozone ministers observed that requested Greek economic reforms had failed to materialise, announcing that of the 15 requirements laid down by EU officials last year as a prerequisite for the receipt of financial aid, only 2 of the 15 conditions had thus far been fulfilled by the Greek government.  

Eurozone finance ministers had stated that all 15 of the conditions are required to be met before Greece can be considered in the frame for debt relief talks – something prime minister Tsipras sees as essential. And despite the failure to meet the requirements that would unlock the tranche of funding, Greek finance minister Euclid Tsakalotos has urged his EU counterparts to reach a decision on short-term and medium-term debt relief for Greece by the end of the year.  

Recognising that debt relief is a crucial issue not only for Greece but for Europe and the entire eurozone, and one that affects big markets and economies such as Italy, France and Spain, Dimitris Papadimoulis, vice president of the European Parliament and head of the Syriza party delegation, said: “From the creditors’ side, mid and long-term measures of debt relief have to be concrete, based on what was agreed on May 2016 [the first tranche of funding] with the so-called 'roadmap' on the Greek public debt – the conclusion of specific measures by the end of December 2016.

“In the same context, it is vital for the creditors to acknowledge the need for realistic primary surpluses after 2019, meaning 2.5 percent for 2019 and 2 percent for 2020. Lowering primary surplus targets can facilitate and improve government’s economic policy mix, reach sustainable levels of growth and ameliorate burden-sharing of taxes among the social groups.”   

Overall, the second review of Greece’s bailout programme sent a clear message that it needs to be completed as soon as possible so that enough time is left for the Greek government to implement further reforms, oversee a steady return to growth, combat unemployment and reinstate social justice in all levels of public life.

On a positive note, prime minister Tsipras told his audience in Thessaloniki that Greece was “turning the corner” and that despite creditors making things more difficult, the country would see economic growth of 2.7 percent in 2017.

News: Greece’s Tsipras Calls for Prompt Completion of Bailout Review

Three-quarters of FIs hacked during last two years, claims new KPMG report

BY Fraser Tennant

A hard-hitting report released this week makes the startling claim that three-quarters (almost 8 in 10) of financial institutions (FIs) have experienced a cyber attack in the past two years, leading to many personal bank accounts being compromised.

The report, KPMG’s ‘Consumer Loss Barometer’, states that despite the financial services sector being proactive when it comes to matters of information security, more than one-third of consumers have said that their personal bank accounts have been compromised.

Furthermore, the report reveals that the vast majority of consumers would change banks if their provider of financial services did not take the proper steps to deal with the consequences of a cyber attack.  

“Financial institutions have a real opportunity to solidify trust with their customers by demonstrating that security is a strategic imperative, and that they are taking every possible precaution to protect consumers,” said Jitendra Sharma, KPMG’s advisory line of business leader, financial services. “Consumers have a lot of options in this environment, so companies must get it right as the battle for customers is fierce.”

Having surveyed 400 senior cyber security executives (including 100 operating in financial services) and 440 banking consumers, the report found that: (i) 66 percent of finance executives said their companies invested in information protection in the past year; (ii) 85 percent of executives confirmed that they have a person in their company whose sole role is to oversee matters pertaining to information security; and (iii) 37 percent of banking consumers made it known  that they would move to a new financial services provider if their bank refused to cover their losses.

In addition, consumers indicated that they would like their bank to guarantee to cover losses, issue frequent communications and updates and provide a free credit report in the event of a cyber security incident. KPMG also found that the financial services sector is the most proactive of all the sectors surveyed, with many FI’s investing heavily in information protection.  

“It is encouraging to see that financial institutions are clearly making the investment in information security and are ahead of their peers from other sectors,” said Charles Jacco, advisory principal, financial services at KPMG. “But in order to retain loyal customers and attract new ones, they will need to continue demonstrating their commitment and ability to protect their customer’s assets and to put their minds at ease.”

Report: Consumer Loss Barometer

Global ETF AUM to top $7 trillion by 2021

BY Fraser Tennant

Exchange Traded Funds (ETFs) are expected to grow exponentially over the next five years, with global assets under management (AUM) set to top $7 trillion, according to a report released this week by PwC.

In ‘ETFs: A roadmap to growth’, PwC predicts that the ETF market will achieve further significant growth through entering new markets, expanding distribution channels and asset classes.

The report’s main findings show that: (i) the North American ETF market is expected to grow to $5.9 trillion by 2021 (a 23 percent cumulative annual growth); (ii) the European market is expected to grow 27 percent annually (reaching $1.6 trillion AUM by 2021); and (iii) Asian firms expect ETF AUM to reach $560bn by 2021 (an 18 percent annual growth rate over five years).

Furthermore, the top three segments that are driving this growth globally are financial advisoes, online platforms and retail investors (online platforms having overtaken wealth management platforms to take its place within the top three).

Also found to be a factor in the growth of ETF markets is the advances seen in technology and data analytics, which have encouraged new product creation and driven an evolution in distribution channels. In addition, says the PwC report, digital technology and Big Data will continue to enable successful firms to improve decision making processes, streamline costs and transform investor relationships.

“The global ETF market has a bright future ahead but the next few years will not be without their challenges," said Nigel Brashaw, global ETF leader at PwC. “The ETF market continues to be increasingly crowded, particularly in North America and Europe, where both maturity and momentum continues to dominate.

“Many firms are looking to expand their global footprint which presents challenges as well as opportunities with respect to local and global regulations, tax laws and establishing working relationships with distribution partners.”

Another key challenge and one cited as a major obstacle to growth by 47 percent of survey respondents is that of increased regulation.

Mr Brashaw continued: “Firms across the globe that wish to take advantage of the booming ETF industry will need to invest in investor education, differentiated products and strong distribution channels. There is plenty of competition in the sector and we expect the industry to grow at a healthy and accelerated rate.”

The PwC report surveyed executives (more than 70 percent of the participants were ETF managers or sponsors from approximately 60 firms around the world) during 2015 using a combination of structured questionnaires and in-depth interviews.

Report: ETFs: A roadmap to growth