Universal Banks of UK

Argha Ray

Profits across Banks are growing. HSBC is the top performer. However, RBS still has to return to sound financial health.

Profitability and its Drivers

Loan Impairment, PPI, IRHP, Fines etc. are still a drag on profitability. Fortunately such charges are coming down year on year as bank restructuring picks speed.

Net Interest margin is stable across Banks. The increase for RBS shows that it is recuperating from earlier delinquencies. Overall trends in UK Banking are on an upswing.

Cost to Income Ratio is more or less stable across Banks. Operating expenses are generally on the decline. However, RBS is again a cause of concern.

Cost Management and Regulatory Preparedness

Regulatory environment is fast changing. Current trends suggest that all the banks would be able to meet targets in the near to long term. Both CET1 and Leverage Ratios are on sound footings. Risk Weighted Assets are also coming down across banks. However, HSBC needs to do more on this front. Nevertheless, Regulatory environment poses a significant risk for all banks as CRD IV guidelines get implemented.

Unfortunately for shareholders ROE is on decline across banks. But HSBC is still the top performer on this count. The Asset Quality for Banks are looking up. However, RBS is again a laggard . It is the only bank where Loan loss Rate is increasing significantly.

Health Check

Core Tier 1 Ratio for all banks is increasing. This signifies healthy capital adequacy. Banks have set ambitious targets on this parameter in the near to long term. Banks have also been able to keep tabs on Loans to Deposit ratio. This trend suggests responsible lending. However, HSBC has slipped marginally on this front.

Barclays has been able to maintain balance between Interest and Non Interest Income.

Income Segregation

Lloyds needs to increase the slice for Interest income.

HSBC has not been able to maintain the balance between Interest and Non Interest Income. This signifies propensity towards risky business.

RBS has been the best performer on this count suggesting matured restructuring.

Barclays’ Statutory Profit rose on account of reduced losses in Head Office and Others division.

Line of Business

Lloyds’ Underlying Profit rose due to strong performance of the Commercial Banking division.

HSBC’s Statutory Profit rose on account of reduced losses in Others division. Performance of rest of the divisions were stable.

RBS posted underlying losses due to Loss incurred in its Non Core function.

Barclays performed strongly in UK and reasonably well in other geographies. UK returned the highest income.

Global Diversification

Lloyds is consolidating operations in UK and exiting out of other Non UK activities.

HSBC performed well in Europe and Hong Kong. Rest of Asia Pacific has been a dampener.

RBS’ operations are divided into 5 major geographies.

Data Summary

Year 2013 2012 2013 2012 2013 2012 2013 2012Statutory Profit Before Tax (£m) 2868 797 415 -606 13,681 12,771 -8,243 -5,277Underlying Profit (£m) 5167 7599 6,166 2,565 13,088 9,454 -2,303 2,952Net Interest Margin (BPS) 176 184 111 109 213 232 223 215IRHP Redress (£m) 650 850 405 600 470.4888 369.863 550 700PPI Redress (£m) 1350 1600 3,050 3,575 458.3628 1051.45 900 1,110Impairment Charges (£m) 3071 3340 2,741 5,149 3,546 5,140 8,432 5,279Cost to Income Ratio 79 84 82.9 77.9 59.6 62.8 64 59Operating Expenses (£m) 21,972 21,012 15,322 15,974 23,377 26,550 19,568 17,939Return on Equity 1 1.2 2 3.3 9.2 10.5 4.6 8.9Loan Loss Rate (BPS) 64 70 57 102 60 90 200 120Core Tier 1 Ratio 13.2 10.8 14 12 13.6 12.3 10.9 10.3Loans to Deposit Ratio 101 110 113 121 74.4 72.9 94 100Interest Income (£m) 11,600 11,654 7,338 7,718 21,547 23,300 10,992 11,417Non Interest Income (£m) 16,555 17,934 30,647 31,195 25,948 18961.97 8,450 10,668

Barclays Lloyds Hsbc Rbs

Assumptions and References

• Data may not be comparable across Banks.• HSBC reports financial performance in USD. All figures for HSBC has been converted into GBP

based on exchange rates on 31-Dec-2012 and 31-Dec-2013, wherever applicable, using www.oanda.com.

• Profit or Income by geography for RBS is not available in Annual Report.• Form 20-F has been used for data collection for Barclays, Lloyds and HSBC.• Form 20-F is not available for RBS for 2013.• Data collection for RBS has been done from Annual Report and Financial Supplement

Spreadsheet on its website.• Performance Benchmarking Report – FY 2012 by KPMG has been referred.• Industry Report Card by Standard and Poor’s has also been referred.