UK banks troubled over future growth in wake of PPI mis-selling scandals 
 
Benchmarking Report suggests that the next six months will remain challenging for banks as they face customers who do not trust them, uncertainty over future growth streams and additional costs from further regulation

In light of constrained growth, cost control is likely to remain a key priority for banks as they struggle to grow top line revenues across many areas of their businesses and are faced with growing costs from regulation, which will require them to hold higher capital and liquidity, says KPMG’s UK Banks Performance Benchmarking Report.

For retail banks, the conclusion of the PPI mis-selling case was undoubtedly the big issue for the first half of the year and profits will suffer from the very significant redress bill. Up until three years ago, PPI accounted for up to 25% of the profitability of some retail divisions which suggests that retail banking needs to find a new business model!

For investment banks, the first half of the year proved very disappointing on both sides of the Atlantic. Trading volumes have slumped, the rate environment has flat-lined, banks’ convergence on the same strategic areas – equities, emerging markets, e-commerce platforms – has led to margin compression and underwriting activity is subdued. Overall the outlook is very challenging.

Combined interim profits of the five major UK banks were nearly half those recorded in June 2010 due to the impact of remediation costs of Payment Protection Insurance (PPI), sovereign debt losses and continued lacklustre income growth. The first half of 2011 saw the five major banks make a combined statutory profit before tax of £7.9 billion, an increase on the preceding six months (£6.4 billion), but significantly down on the first half of 2010 (£15.7 billion).

David Sayer, global head of retail banking at KPMG, commented: “The recent results illustrate that banks are still struggling to grow top line revenues. With future growth becoming increasingly difficult to source, bank executives have been forced to step up their focus on cutting costs wherever possible in a bid to make their businesses more profitable. If growth does not return, further cost cutting seems inevitable.

“There is great uncertainty regarding the future direction of markets which is troubling the industry. Concerns about future revenue growth, global regulation and the final report from the Independent Commission on Banking are burdening the sector. Banks are looking closely at their business models to determine whether they are sustainable.”