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After record profits, are UK banks fighting the ‘last war’?

Monday, 19 Aug 2013 | 8:03 AM ET
Banks need a return on equity acceptable for investors: Pro
David Sayer, global head of banking at KPMG, tells CNBC that the new normal for UK banks is not like the old normal and returns on equity have halved.

All five of the U.K.'s biggest banks posted profits for the first half of 2013, but a report on Monday warned that banks and regulators may be too focused on combating the wrongs of the past to take heed of future threats.

In its half-year report on the U.K. banking sector, professional services firm KPMG noted the "surge" of initiatives to guard against another banking crisis, caused by factors such as another liquidity crunch, or capital weakness.

KPMG warned however, that banks and regulators could be fighting the "last war", with future threats possible from huge payment outages, failures at central counterparty clearing exchanges, and cyber-attacks.

"There has been a surge of initiatives and reforms to guard against another banking crisis caused by such factors as another liquidity crunch or inherent capital weakness. But… are we still fighting the last war? The next systemic shock, if there is one, could come from an as yet unforeseen event such as a massive systems outage or a new breed of cyber-attack," KPMG said in the report.

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KPMG highlighted that U.K. banks suffered a 12 percent increase in online account fraud last year and that the motivation for attacks was shifting from financial crime to political and ideological attacks, with the number of state-sponsored hacking and 'hacktivist' revenge incidents growing.

"Six major U.S. banking institutions suffered website outages in 2012. Their U.K. counterparts have escaped similar mass disruption assaults so far — but they remain under pressure to ensure their critical systems are robust enough to cope with a failure," the report said.

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Another risk comes from the massive leadership changes that U.K. banks have experienced in the last few years. According to KPMG, 75 percent of non-executive directors and 72 percent of executive managers were replaced at the five major U.K. banks — Barclays, HSBC, Lloyds Banking Group, Royal Bank of Scotland (RBS) and Standard Chartered — between 2006 and 2012.

"There is a risk that boards and senior management are forced to become short-termist and risk averse, focused on their institution's (and indeed their own) immediate safety and survival, rather than looking for a sustainable route back to growth," said the report.

KMPG also warned that the raft of regulatory changes, and the speed at which they are being implemented, could also put banks at risk.

"There is a risk with every regulatory regime that you take it just past the point in terms of benefit to the wider economy," David Sayer, global head of banking at KPMG, told CNBC.

"There is a point, and that point might be in the next 12 months, when the economy takes off, and business do want to borrow, that actually regulators need to say, we have probably got enough there."

Sayer said that as a result of capital ratio reforms, bank equity returns have halved to around 10 percent, down from roughly 20 percent pre-crisis.

"Bankers now need to rework the business model so that they can get a return on equity which is acceptable to investors," he said.

Barclays, HSBC, Lloyds Banking Group and RBS – posted combined profit of £16.5 billion ($25.8 billion) in the first half of 2013. This was the first time since 2010 that all five banks had record a profit.


—By CNBC's Katy Barnato

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