London's biggest banks will struggle to reach sustained profitability due to bad debts and regulatory fines, IMF and KPMG warn

Jake Cordell
Follow Jake
HSBC Announce Plans To Remain In The UK
Weak forecasts have led analysts to predict job losses in Canary Wharf and the Square Mile (Source: Getty)

A toxic mix of bad debts and regulatory fines will see some of London’s biggest banks struggle to reach sustained profitability, according to two major new reports from the International Monetary Fund (IMF) and KPMG.

The hard-hitting reports have prompted city analysts to predict looming job cuts in the Square Mile and Canary Wharf, while one influential Tory MP has sensationally warned of a fresh crisis in the coming years.

“Banks are far too leveraged… with no real tangible assets,” Conservative MP Steve Baker, who sits on the Treasury Select Committee, told City A.M. “We are going to have further bank failures. At some point in the next few years we will have a banking crisis worse than the one before.”

The IMF’s Global Financial Stability Report ranked the world’s biggest lenders according to 14 different fundamentals, five relating explicitly to banks’ profitability. Deutsche Bank and Credit Suisse were in the bottom 30 per cent of all banks for four of the five measures. Of the UK banks, Lloyds and Royal Bank of Scotland (RBS) raised the most concerns for the IMF.

One-third of all Europe’s lenders, as measured by a share of total assets, face “significant challenges to attaining sustainable profitability”.

The IMF predicted that without action, “financial soundness could become eroded to such an extent that both economic growth and financial stability are adversely affected”.

And in a new report into UK banking out today, KPMG has set out the scale of financial issues facing the sector. It found that profits before tax at the UK’s five biggest banks – Barclays, HSBC, Lloyds, RBS and Standard Chartered – dropped by 40 per cent in 2015, to £12.4bn.

Meanwhile redress for scandals such as PPI mis-selling and forex benchmark fixing is up 35 per cent in a year. Over five years, the collective bill for financial misconduct hit £55bn, equivalent to 72 per cent of profits.

“The banks cannot sustainably continue to operate with the cost base they have,” warned KPMG’s banking partner Tim Howarth. He added: “There are still emerging issues from the past and we are still seeing regulators continue to investigate.”

Negative interest rates, capital buffers, ring-fencing rules, and generally low growth rates around the world are creating a “perfect storm for global banks” and squeezing their ability to make money, Simon French, chief economist at Panmure Gordon, said.

On job cuts, French said: “We are probably closer to the start than the end. There will probably be a fairly persistent downsizing in the size of the labour pool being taken on by UK banks.”

The warning comes after Nomura became the latest investment bank to announce redundancies, as it cuts around 500 roles from its London HQ.

The IMF called for an “ambitious policy agenda... to strengthen the resilience of the global financial system”. It wants banks to address their stock of bad debts and to build their balance sheets while also calling for tougher regulators.

In the coming days, investors will get their first look at just how bad 2016 is expected to be for some of the world’s biggest banks. A Reuters poll revealed that analysts are forecasting a 20 per cent decline in average earnings from the six biggest US banks.

Today, Bank of America and Wells Fargo report.

Related articles