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The reformation of the banking sector has entered a new chapter as banks must rebuild shattered trust and confidence, redefine culture and behaviour, rein in costs and focus on core businesses, says a new report from KPMG. Entitled Focus on Transparency: Surviving the Storm, the study analyses the 2011 financial reports of Europe’s 15 largest banks and discusses key industry issues including governance, remuneration and regulation. Bill Michael, UK head of financial services at KPMG, said: “It is clear that the banking sector’s redemption is far from complete, and its reformation has now entered a new phase. Recent events have made it abundantly clear that banking has no choice but to operate in a fundamentally different fashion. Public confidence in the sector has been dealt another blow, and it is critical that banks demonstrate that deep-seated change is afoot. “This is a watershed moment and there is, quite simply, no turning back now. Excessive bonuses and opaque remuneration packages will no longer be tolerated, nor will passive boards. Shareholders and customers need to be convinced that executive compensation and the company’s long-term performance are appropriately aligned. This calls for much greater transparency in accounting and reporting practices. “Behaviour and culture must also be overhauled, and this must be led from the top. The rulebook for what is acceptable conduct needs to be rewritten, and accountability across all levels is key.” Financial analysis in the report shows that combined profits hit €62bn at the leading 15 European banks in 2011, against €84bn in 2010. Only five of the largest banks reported an increase in profits during the year, while 10 saw an increase in their cost income ratio, and total incomes shrank for seven banks. Retail and commercial banking performance was resilient; loan impairment charges in retail and commercial portfolios fell on average by 10% across the group, with the total charge being €71bn in 2011 (2010: €79bn) thanks to improving credit conditions and the management of non-core activities. On the other hand, net revenues of investment banking reduced on average by 13.5% due to the difficult economic and market conditions, especially in the second half of 2011. This led to lower margins and reduced trading volumes which impacted revenues as clients pulled back activity in light of the eurozone crisis. Bill continued: “European banks are fighting a battle against seemingly insurmountable odds as the short-to-medium-term future looks extremely difficult. Increased capital costs, new legislation, possible transaction taxes and potential litigation are on the horizon – not to mention the ongoing euro debt crisis and the escalating situation in Spain. “The business of banking has been turned on its head and with many European banks trading at a discount to net asset value, it is clear that the market is no longer buying the notion of double-digit growth for these banks. While shareholders continue to look for a reasonable return on equity, it is still unclear what will emerge as an acceptable rate given that we are unlikely to see a return to the highs of four or five years ago. A key challenge for banks is to understand what the new normal for the sector is, and to adjust their business models accordingly. “The universal banking concept, which has long been the holy grail for global banks, is being seriously questioned. Big global banks are incredibly complex and opaque. The need and demand for greater transparency will intensify pressure on the sustainability of the universal banking model.” Other Business Money News
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