Banking sector ‘facing difficult balancing act’

Combined profits of some £16.5bn, modest lending growth and falling impairments are fuelling hopes that the banking sector is starting to get back on track after the financial crisis.

But the industry looking very different post crisis and is adjusting to a future in which bank business models are “unlikely ever to be the same again”, said the accountancy firm.

To illustrate the point, return on equity – a key measure of a bank’s performance – remains in single digits despite a rise in overall lending and customer deposits.

Return on equity has roughly halved compared to 2005 levels, said KPMG, as regulators force banks to hold more capital.

“Banks are safer but much less profitable per shareholder,” said the firm, which has an office in Leeds.

Profits would have been 20 per cent larger had the banks not needed to atone for misbehaviour by setting money aside against PPI claims (£2.3bn) and interest rate hedging products (£700m).Restructuring costs also hit profitability.

Bill Michael, head of financial services at KPMG, said: “While it is great that the most recent bank results are in the black, there remains real uncertainty on the shape of their business models in the future. We have reached an inflection point. Capital requirements are going to put huge pressure on banks to deleverage.

“The fear is that we will end up with a UK banking sector with very narrow choice, where individuals will not be able to get the products they need. We have to get the balance right between prudence and growth.”

Regulatory change, speed of reform and new leadership pose systemic threats, added KPMG.