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KPMG: European Banks – Focus on Transparency
08/17/2011 I Source KPMG Romania
European leading banks’ profits up in 2010 but risk from sovereign debt crisis may turn the tables.
The leading 15 European banks made collective profits of €85 billion in 2010, double the amount recorded in 2009 and up from losses of €25 billion in 2008. They look well-placed for recovery in normal conditions – but sovereign debt concerns may mean that difficult times are looming again according to a new report from KPMG.
KPMG’s report on the leading 15 European banks, Focus on Transparency, finds that the performance of retail and commercial banking in 2010 has improved amidst growing emerging market activity and economic recovery, while investment banking revenues were off very slightly by 2% to €121 billion. A substantial amount of the banks’ increased profits is the result of a significant decrease in loan impairment charges. Impairments in retail and commercial banking fell 27% to €79 billion while in investment banking they fell by 29% to €80 billion. These decreases enabled banks to largely offset the effect of reduced revenues in investment banking, and contributed to the increased revenues reported in retail banking. This means that from losses of €25 billion in 2008, there has been a €110 billion profitability swing in European banking in just two years.
But KPMG warns that this trend is unlikely to continue.
As Serban Toader, Senior Partner at KPMG in Romania points out: “European banks have come a long way since the dark days of 2008, when governments had to step in to save many from collapse following the fall of Lehman Brothers. However exposure to sovereign debt is a major challenge, particularly in the context of the eurozone crisis. Although Romanian banks have little or no exposures to eurozone governments that are now under sovereign debt scrutiny, they do have significant exposures to Romanian sovereign debt. This could present a risk if contagion from the eurozone debt crisis were to put pressure on the Romanian government’s finances. A new wave of regulation is also about to be introduced, which could affect banks’ profits. Regulatory capital requirements under Basel III will be challenging and will affect profitability and return on equity of banks. The banks also have €92.5bn of deferred tax assets (broadly, losses held against tax liability) on their balance sheets, equating to around €334bn of probable future taxable profits that need to be generated to recover them. In these uncertain times, the view on availability of future profits could change quickly, resulting in the potential write down of some balances.”
As Cezar Furtuna, Financial Services Partner in KPMG in Romania explains; “Two out of the fifteen European banks surveyed have operations in Romania. However the situation of most Romanian banks, including the Romanian branches of larger groups, is quite different from that of the banks surveyed at European level. While 2008 was a good year in the recent history of Romanian banking (in marked contrast to the Western Europe but also influenced by some profitable divestments made by banks) in 2009 and 2010, the profits of Romanian banks fell substantially. The reason is that the recession hit Romania (and CEE) later than Western Europe, really only beginning to bite in 2009. Since then, Romanian banks have suffered from the general slow-down in economic activity which was more severe than in other European countries and also from blockages caused by the credit crunch at the start of the recession, hence the decreasing trend in profits in 2009 and 2010. We analyzed for example the IFRS results for 25 Romanian banks making up €71 billion in assets as at the end of 2010. Their collective IFRS profits in 2010 stood at €517 million, down 27% from the 2009 level (in constant FX terms). Only 15 of the 25 banks considered recorded profits in 2010. 11 banks were profitable in both years but only 4 of them had increases in profits as compared to 2009. Our yearly Performance Benchmarking Report will be published this autumn based on IFRS financial statements and will show the full picture of bank performance drivers in 2010 and expectations for 2011.
As Furtuna continues: “There are still significant concerns about non-performing loans to Romanian companies and individuals. The number of non-performing loans has increased considerably since the start of the recession as companies and individuals have had more difficulties in repaying their debts. The combination of shrinking business or personal income and, on the other side, having to reimburse loans taken out in Euros, Swiss Francs or other foreign currencies, has made repayment difficult for many. We are still far from seeing significant decreases in the loan impairments. Some banks’ half year results are available but probably only the full year 2011 results will show whether Romanian banks have started to reverse the recent trend in performance. For sure the turnaround will very much depend on the speed of Romania’s economic recovery and on the development of the sovereign debt crisis.”
About KPMG
KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 150 countries and have 138,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
KPMG in Romania and Moldova operates from six offices located in Bucharest, Cluj-Napoca, Constanta, Iasi, Timisoara and Chișinău. We currently employ more than 600 partners and staff; Romanians and Moldovans as well as expatriates.
The leading 15 European banks made collective profits of €85 billion in 2010, double the amount recorded in 2009 and up from losses of €25 billion in 2008. They look well-placed for recovery in normal conditions – but sovereign debt concerns may mean that difficult times are looming again according to a new report from KPMG.
KPMG’s report on the leading 15 European banks, Focus on Transparency, finds that the performance of retail and commercial banking in 2010 has improved amidst growing emerging market activity and economic recovery, while investment banking revenues were off very slightly by 2% to €121 billion. A substantial amount of the banks’ increased profits is the result of a significant decrease in loan impairment charges. Impairments in retail and commercial banking fell 27% to €79 billion while in investment banking they fell by 29% to €80 billion. These decreases enabled banks to largely offset the effect of reduced revenues in investment banking, and contributed to the increased revenues reported in retail banking. This means that from losses of €25 billion in 2008, there has been a €110 billion profitability swing in European banking in just two years.
But KPMG warns that this trend is unlikely to continue.
As Serban Toader, Senior Partner at KPMG in Romania points out: “European banks have come a long way since the dark days of 2008, when governments had to step in to save many from collapse following the fall of Lehman Brothers. However exposure to sovereign debt is a major challenge, particularly in the context of the eurozone crisis. Although Romanian banks have little or no exposures to eurozone governments that are now under sovereign debt scrutiny, they do have significant exposures to Romanian sovereign debt. This could present a risk if contagion from the eurozone debt crisis were to put pressure on the Romanian government’s finances. A new wave of regulation is also about to be introduced, which could affect banks’ profits. Regulatory capital requirements under Basel III will be challenging and will affect profitability and return on equity of banks. The banks also have €92.5bn of deferred tax assets (broadly, losses held against tax liability) on their balance sheets, equating to around €334bn of probable future taxable profits that need to be generated to recover them. In these uncertain times, the view on availability of future profits could change quickly, resulting in the potential write down of some balances.”
As Cezar Furtuna, Financial Services Partner in KPMG in Romania explains; “Two out of the fifteen European banks surveyed have operations in Romania. However the situation of most Romanian banks, including the Romanian branches of larger groups, is quite different from that of the banks surveyed at European level. While 2008 was a good year in the recent history of Romanian banking (in marked contrast to the Western Europe but also influenced by some profitable divestments made by banks) in 2009 and 2010, the profits of Romanian banks fell substantially. The reason is that the recession hit Romania (and CEE) later than Western Europe, really only beginning to bite in 2009. Since then, Romanian banks have suffered from the general slow-down in economic activity which was more severe than in other European countries and also from blockages caused by the credit crunch at the start of the recession, hence the decreasing trend in profits in 2009 and 2010. We analyzed for example the IFRS results for 25 Romanian banks making up €71 billion in assets as at the end of 2010. Their collective IFRS profits in 2010 stood at €517 million, down 27% from the 2009 level (in constant FX terms). Only 15 of the 25 banks considered recorded profits in 2010. 11 banks were profitable in both years but only 4 of them had increases in profits as compared to 2009. Our yearly Performance Benchmarking Report will be published this autumn based on IFRS financial statements and will show the full picture of bank performance drivers in 2010 and expectations for 2011.
As Furtuna continues: “There are still significant concerns about non-performing loans to Romanian companies and individuals. The number of non-performing loans has increased considerably since the start of the recession as companies and individuals have had more difficulties in repaying their debts. The combination of shrinking business or personal income and, on the other side, having to reimburse loans taken out in Euros, Swiss Francs or other foreign currencies, has made repayment difficult for many. We are still far from seeing significant decreases in the loan impairments. Some banks’ half year results are available but probably only the full year 2011 results will show whether Romanian banks have started to reverse the recent trend in performance. For sure the turnaround will very much depend on the speed of Romania’s economic recovery and on the development of the sovereign debt crisis.”
About KPMG
KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 150 countries and have 138,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
KPMG in Romania and Moldova operates from six offices located in Bucharest, Cluj-Napoca, Constanta, Iasi, Timisoara and Chișinău. We currently employ more than 600 partners and staff; Romanians and Moldovans as well as expatriates.
