Focus on Transparency. Financial reporting of European banks in 2010
 |
23 August 2011 |
 |
KPMG ROMÂNIA S.R.L. |
Adresa
DN 1 Bucureşti Ploieşti, Nr. 69-71
013685 Bucureşti, Sector 1
Telefon
+40-21-201.22.22
Fax
+40-21-201.22.11
Website
www.kpmg.md
www.kpmg.ro
Executive summary
KEY FINDINGS
2010 was a less volatile year than 2009…
...but with regulatory change cited as one of the most significant challenges facing the banks in 2011, and the sovereign debt crisis adding significant uncertainty…
…was 2010 the calm between two storms?
• Combined profits hit €85 billion at the leading 15 European banks in 2010, double the previous year’s profits…
…but major reductions in impairment charges flattered the bottom line.
• Chairmen and chief executives believe their banks are well placed for recovery, focusing on core businesses and relationships…
…but accept need to rebuild trust and confidence while sounding notes of caution over an uncertain future.
• Retail and commercial banking performance improved amid emerging market activity and economic recovery...
…but investment banking revenues fell 2% to €123 billion, due to lower transaction volumes and increased competition.
• All 15 European banks have Core Tier 1 capital in excess of the minimum 8% prescribed by Basel 2…
…but proposed regulatory requirements under Basel 3 will be challenging.
• €92.5 billion of deferred tax assets recognised on balance sheets implies approximately €334 billion in future taxable profits…
…but the figure remained the same as the previous year, suggesting further challenges for the banks.
THE CALM BETWEEN TWO STORMS
Driving new changes
Europe’s leading banks are staring at a financial storm that could wreck their fragile recovery. While some may have hoped that 2010’s financial results of the 15 largest European banks signalled a clear road ahead, the growing sovereign debt crisis in the Eurozone could drive that hope away.
Combined with the rising tide of regulation, restricted liquidity and weak confidence, the banks face a volatile future that will once again place them under severe strain.
The 2010 reports showed a greater tention to sovereign debt risk than in previous years, with speculation of government bail-outs for Portugal and Spain, in line with those for Ireland and Greece. All the banks commented on this debt, although not all have a material exposure.
But the speed of developments was not foreseen at the time the annual reports were being written. While government bail-outs were discussed in the 2010 reports – with Greece receiving funding in May 2010, Ireland in November 2010 and Portugal in May 2011 – debt restructuring in the first quarter of 2011, and its potential impact on the banking sector, has become an issue of growing concern. The latest round of European Banking Authority stress tests will require the banks to disclose sovereign debt exposure by accounting portfolios, maturities and countries. This will expose the level of risk facing the banks, and sovereign debt could be the vanguard of another banking crisis.
Lower impairments drive profits
The good news is that profits grew in 2010: the combined profits for the 15 banks hit €85 billion in 2010. That was double 2009’s figure of €43 billion, and a vast improvement on 2008’s combined losses of €25 billion. Only one bank remained in a loss making position, but even here the losses were substantially reduced.
Despite this, the banks are rightly cautious, seeking to avoid any premature optimism – their chairmen and chief executives acknowledge that the sector is far from out of the woods.
However, a substantial amount of the increased profits came from a significant decrease in loan impairment charges. Impairments fell 29% to €80 billion in 2010. These decreases appeared to offset the effect of reduced revenues, particularly in investment banking.
There were other contributors to the increase in profitability. Some of the banks pointed to strong performances in emerging market activities – those banks that are particularly active in Asia and Latin America benefitted from the continuing growth in these regions.
Somewhat higher derivative fair values were also reported due to restored confidence and improved trading volumes, especially in the second half of the year. At the same time, divesting non-core activities and focusing on client relationships (a key feature of the chairmen’s reports) remained key trends for the year.
The deferred tax positions merit particular comment, as on the face of it they reflect growing optimism. In total, €92.5 billion of deferred tax assets were held on balance sheet at 31 December 2010, representing around €334 billion of profits that will be taxed in the future, compared to €90 billion at 31 December 2009. In these uncertain times, the view on availability of future profits could change quickly, resulting in the potential write down of some balances.
