banking
sponsored by:
FINANCIAL MARKETS SERIES
BANKING MAY 2012
Huntswood is one of the UK’s leading independent professional services organisations, serving retail and private client banking organisations and others in heavily regulated markets. Our prime focus is the provision of solutions to complex regulatory challenges that our clients are facing; with no distractions from competing interests, leveraging a considerable track record of expertise and excellence in UK regulated markets. We support all of the UK’s top retail banks, eight of the top ten life and pension companies, six of the top ten General Insurers and 13% of the FTSE 100. To achieve our mission of performance optimisation and risk reduction in highly regulated and complex markets for our clients, our business is split in to four core areas: • Customer Service Delivery – the provision of highly responsive, quality resource solutions to clients facing immediate operational regulatory challenges, either on an in-sourced or out-sourced basis; • Consulting – supporting firms through the ever-changing regulatory landscape with deep technical expertise and market leading consultancy to the UK Banking sector and beyond; • People, Learning & Development – supporting our clients with the challenges of shaping operational excellence by providing expert insight into customer behaviours and delivering award-winning employee development programmes; and • Recruitment – supporting our clients’ permanent, interim and contract recruitment needs in banking sectors and beyond. We can provide the skilled resources for organisations to deal with here and now regulatory challenges; we can advise on what the true impact analysis is from the regulations; and we can also train employees to become the best they can be through deepening their ability to compete in highly complex markets. We can also support firms through their recruitment aims to find the right candidate. Our distinctive combination of technical insight in regulated markets and provision of skilled resources in this sector positions Huntswood uniquely with clients’ evolving regulatory challenges, making us the preferred supplier of choice for a considerable number of leading UK banking organisations and more. www.huntswood.com
TheCityUK champions the international competitiveness of the financial and professional services industry. Created in 2010, we support the whole of the sector, promoting UK financial and professional services at home and overseas and playing an active role in the regulatory and trade policy debate. TheCityUK has a global export focus with a commitment to help UK based firms grow their business in other parts of the world. In 2010, the financial services industry accounted for 9% of UK GDP and 12% of UK tax receipts. The sector currently employs more than 1 million people, more than 66% of whom work outside London, and underpins the businesses that drive jobs and growth. Added together with nearly 1 million employed in professional services, it is easy to see the importance of a sector that employs 7% of the working population. TheCityUK provides constructive advice and is the practitioner voice on trade policy and all aspects of taxation, regulation, and other legislative matters that affect the competitiveness of the sector. We conduct extensive research and run a national and international events programme to inform the debate. Our senior team regularly engages with regulators and policymakers at home and overseas, ensuring the sector’s views are represented at the highest levels. We are tasked with creating a new vision for the financial services sector. We are focused on supporting policymakers and business to deliver the new policy ideas which will help deliver growth.
BANKING MAY 2012
This report gives an overview of the UK banking sector and sets out its importance in an international context. The global banking sector has seen a considerable slowdown in growth since the start of the economic downturn and confidence in its stability has yet to be fully restored. Systemic risks have however been reduced following policy actions and signs of gradual improvement in the global economy. Further risks remain and the banking system is expected to continue to address challenging market conditions in the coming years.
Assets of largest 1,000 banks up 6.4% in 2010/11 to
$101.6 trillion
Chart 1 Worldwide banking industry assets and profits Assets of largest 1,000 banks, $ trillion (bars)
SUMMARY
120
International comparisons Assets of the largest 1,000 banks grew
100
by 6.4% in 2010/2011 to a record $101.6 trillion (Chart 1), with the highest growth registered in China. TheCityUK forecasts a further 6% increase in industry assets during 2011/2012. Profits have seen a sharp decline at the outset of the credit crisis but have since recovered nearly to pre-crisis levels. Banks from emerging market countries have on the whole been less affected by the economic slowdown, and are expected to drive growth in the coming years (Chart 2). In Europe, the increase in sovereign risk in some countries and concerns about government debt levels have spilled over into the banking system, raising the cost of borrowing for many banks and depressing their market capitalisation. Despite the global rise in funding costs, banks around the world have made progress in raising capital ratios. Many banks will need to increase capital levels further as a result of Basel III changes which include higher capital requirements and tighter liquidity rules. A further challenge for the global banking sector in the forthcoming period will be the need to refinance some $3.5 trillion in short-term wholesale funds maturing in 2012 and 2013 (Chart 3). Investment banking fee revenue totalled $70.3bn in 2011, down slightly on the previous year. Business activity has slowed in the second half of 2011 and first quarter of 2012 due to a fall in deal activity and trading volumes. Equity underwriting, fixed income underwriting, M&A advisory and syndicated loans business each accounted for around a quarter of fee revenue in 2011. The US was the source of 54% of business, its highest share in five years. Europe’s share declined during this period to a quarter from close to 40%. The UK was the source of some $3.3bn or a fifth of European fee revenue making it the fourth largest market behind the US, China and Canada. A larger proportion, or about a half of European investment banking activity, is conducted through London.
www.thecityuk.com
Pre-tax profits of largest 1,000 banks, $ billion (line)
800 700 600
80
500
60
400 300
40
200 20 0
100 00/01
02/03
04/05
06/07
08/09
10/11
0
Source: The Banker
Chart 2 Share of global banking assets % share 22.9%
China
10.2% 14.8% 13.3% 12.2%
US India
1.0% 3.8%
Japan
10.4%
2050
3.4% 1.6%
Brazil
2010
2.9%
UK
11.7% 2.7% 4.9%
Germany
2.5%
France
8.7% 2.2% 0.7%
Russia 0
5
10
15
20
25
Source: PricewaterhouseCoopers, IMF, TheCityUK
1
may 2012
banKing
UK banking sector assets totalled a record £8,119bn at the end of 2011, up 3% on the previous year. International banks hold nearly half of UK banking assets while UK owned banks have over half of their assets outside the country. UK banks have made significant progress in improving their capital and funding since the peak of the crisis and have reduced their reliance on the Government for liquidity support. Credit availability however remains constrained, in common with other developed countries. The UK banking sector’s direct exposure to vulnerable sovereign debt in Greece, Portugal, Italy, Spain and Ireland totalled around £15bn at the end of Q3-2011. UK banks have larger exposures to the private sectors in these countries, of over £190bn. This was considerably less than, for example, France and Germany, which had exposures to the vulnerable euro-area of over £400bn and £300bn respectively and more than four times the UK banks’ holdings of sovereign debt. The UK is the leading centre for international banking and home to several of the largest global banks. Its assets are the second largest in the world after the US and, in terms of foreign owned assets, the largest in the world. It has the largest global share of cross-border bank lending (18%). The 251 foreign banks physically located in the UK is more than in any other centre. The UK is also one of the most important centres for private and investment banking and Islamic banking. The rapid rise of internet services have made electronic delivery channels a key priority area for banks. In terms of IT costs, online banking is expected to be the fastest growing area in 2012, with an expected 5.3% increase in spending, followed by mobile telephone banking (5%). Some 44 million customers in the UK have registered for online banking and 38 million for telephone banking, with the number of online banking transactions having more than doubled between 2005 and 2010.
Contribution to the UK economy Net exports of UK banks totalled £25bn in 2010. The UK banking industry contributed £56bn to the economy in 2010, equivalent to 4.8% of GDP, or over half of the 8.9% generated by the financial sector as a whole. Banks located in the UK provided employment for 454,200 people in 2010, over two-thirds of whom were employed outside London. Financial services contributed some £63.0bn in taxes during 2011, or 12.1% of all UK Government receipts. Over two-thirds of this came from the banking sector.
INTERNATIONAL BANKING MARKET The global banking sector has seen a considerable slowdown in growth since the start of the economic downturn. Profits have declined sharply at the outset of the credit crisis but have since recovered nearly to pre-crisis levels. While the financial crisis originated in the US, financial institutions around the world have been affected. Central banks have taken unprecedented interventions to increase liquidity in their banking systems through measures such as monetary policy actions, guaranteeing bank liabilities and recapitalisation. Banks have also made efforts to identify toxic assets, implement deleveraging and adjust business models. International regulators are establishing new rules that will seek to reduce the risk of financial crises and to make the financial system more resilient. Systemic
2
Chart 3 Global bank debt maturity profile $bn, debt maturing 2,000 Others G-10 1,500
1,000
500
0
2011
2012
2013
2014
2015
Source: IMF, Moody’s
Chart 4 Bank rollover requirement 2011-2012, % of total debt Ireland Germany Sweden Switzerland UK US Portugal Spain Netherlands Italy France Belgium Austria Japan Greece
% of debt due in 2012 % of debt due in 2011 0
10
20
30
40
50
figures are for a sample of banks in each country Source: IMF, Bloomberg
1
Chart 5 Largest banking centres assets, $bn, 2010/11 15,000 14,336 12,593
12,000
11,172 11,000 9,371
9,000
6,000
5,305 3,262
3,000
0
US
UK
Japan
China
France Italy Germany
total assets of commercial banks, including subsidiaries Source: IMF, TheCityUK estimates 1
www.thecityuk.com
banKing
risks have been reduced following policy actions and signs of improvement in the global economy. The banking system is expected to continue to address challenging market conditions in the coming years.
Largest banking centres
may 2012
Chart 6 Regional breakdown of largest 1,000 banks % share of total assets 70 60
Worldwide assets of the largest 1,000 banks grew by 6.4% in 2010/2011 to a record $101.6 trillion (Chart 1), with the highest growth registered in China. This follows a 0.9% decline in the previous year, a result of deleveraging in the industry. TheCityUK forecasts a further 6% increase industry assets during 2011/2012. Banks from emerging market countries have on the whole been less affected by the economic slowdown, and are expected to drive the growth of the global banking sector in the coming years (Table 1, Chart 2). The growth rate of assets of the top 1000 banks has averaged around 2.7% a year since the start of the economic downturn. In the years preceding the crisis, bank assets saw double digit growth in some years. Assets of the largest 1,000 banks had more than doubled in the five years leading up to the start of credit crisis. Banks have stepped up efforts to increase capitalisation levels. Despite a rise in funding costs, banks around the world have made progress in raising capital ratios. The global average Tier 1 capital to assets ratio totalled 5.35% in 2010/11, up from 5.14% in the previous year and the low of 4.32% three years earlier. This is set to increase further as a result of global changes in regulation which have raised capital requirements. Although European banks as a whole have raised capital levels, their balance sheets remain leveraged and reliant on wholesale funding to a greater extent than most other regions. In the UK, the extent to which banks have used wholesale markets to fund lending has been reduced significantly in recent years. Banks around the world have over $3.5 trillion in wholesale funds which will need to be refinanced in 2012 and 2013. Bank debt rollover requirements are most immediate in Ireland, Germany and Sweden (Chart 4). This is made more difficult in some European countries by an increase in funding costs and sharp rise in bank debt yields resulting from an increase in sovereign risk. As a result some banks have turned to repo markets and the ECB for refinancing. Regional distribution of assets and number of banks Latin American banks have seen an annual growth of 28% since the start of the economic downturn. Asia Pacific and North American banks grew by 16.3% and 6.9% respectively during this period. Europe on the other hand saw a 3.3% average annual decline. This was partly due to pressures on European banks to deleverage as funding strains intensified and regulators imposed new capitalisation targets. Western European banks held the largest share of global bank assets, 48%, down from 61% three years earlier (Charts 5 and 6). Asian banks’ share increased from 21% to 31% during this period, while the share of US banks increased from 14% to 16%. The UK banking sector assets totalling $12,593bn in 2010/11 were the second largest in the world after the US and its foreign owned assets are were largest in the world (Chart 5). US assets totalled $14,336bn while Japan held the third highest total $11,172bn. Countries with the highest asset growth in 2010/11 included China 44%, Vietnam 34%, Belarus 33%, Peru 32% and Australia 32% (Table 2). Chinese banks accounted for 15 of
www.thecityuk.com
Europe
50 40
Asia-Pacific
30 20 10
North America Rest of world
0 2000/01 2002/03 2004/05 2006/07 2008/09 2010/11 2001/02 2003/04 2005/06 2007/08 2009/10 Source: www.thebankerdatabase.com
Table 1 Emerging market countries bank assets growth
China Brazil India Russia Turkey South Africa Malaysia Saudi Arabia UAE Iran Mexico Poland Source: The Banker
2010/11 % change 214 8,564 310 1,613 133 983 312 652 137 524 61 492 101 405 106 347 308 320 177 288 70 178 132 263
2005/06 2,728 393 423 158 221 305 201 169 78 104 164 113
Table 2 Top 10 countries by asset growth 2009/10-2010/11 1 China 2 Vietnam 3 Belarus 4 Peru 5 Australia 6 Georgia 7 Indonesia 8 South Africa 9 Kenya 10 Azerbaijan Source: www.thebankerdatabase.com
Asset growth (%) 43.9 33.9 32.6 32.0 31.9 30.7 29.6 29.0 27.1 25.3
Table 3 EU-27, US and Japanese banking sectors 2010/11 Number of banks Assets of banks (€ trillion) Assets per bank (€ billion) Top 6 banks’ assets as % of total Top 10 banks’ assets as % of total Bank assets, % of GDP Total bank deposits (€ trillion) Total bank loans (€ trillion) Employees per bank Citizens per bank (thousand)
EU-27 6,825 42.9 6.3 24.3% 35.0% 349% 17.1 17.7 376 73
US 6,530 8.6 1.3 49.6% 56.1% 78% 6.5 4.9 272 48
Japan 715 7.2 35.1 3.8% n/a 174% 5.6 3.9 n/a n/a
Source: European Banking Federation
3
may 2012
banKing
the top 25 highest movers during the year. Nearly all of the top 10 countries with the largest contraction in assets during 2010/11 were from the EU. They included Ireland with a fall of 19%, and Germany and Hungary with a drop of around 10% each. Other EU countries with large contractions in assets included Denmark, Slovenia, Greece, France, Cyprus and Portugal. A regional breakdown shows that there were 345 banks from Asia-Pacific in the 2010/11 Banker Magazine Top 1000 rankings, up from 321 in the previous year. The number of banks from Western Europe totalled 243 (down from 278), North America 190 (184), Middle East 83 (90), Latin America 53 (44), Eastern Europe (51 (48) and Africa 30 (30). The US has by far the largest number of banks (6,530) and branches in the world (83,000). This is an indicator of its geographical dispersity and regulatory structure resulting in a large number of small to medium sized institutions in its banking system. In Western Europe, Germany, France and Italy have over 30,000 branches each. This was nearly three times the number of branches in the UK. Germany has the highest number of registered banks and the most employees. The UK has more ATMs per head, with 1,035 ATMs per 1 million people, ahead of Greece 860, Italy 759 and Germany 705.
Chart 7 Banking sector assets as per cent of GDP % share, end-2010
split between UK domestic and foreign assets
759%
Ireland 548%
Switzerland
521%
UK France
405%
Netherlands
382% 349%
EU-27
332%
Germany
306%
Spain Japan
Total assets UK domestic assets UK foreign assets
174%
US
78%
0
100 200 300 400 500 600 700 800
Source: European Banking Federation
Assets as a per cent of GDP The UK’s banking sector assets as a per cent of GDP totalled around 520% in 2010. This was higher than in the US (78%) and Japan (174%). In the US, a significant quantity of financing takes place through securities markets rather than through bank lending which means that a large proportion of debt is held by non-bank organisations. The EU average of bank assets to GDP was around 350%
European sovereign debt crisis and the banking system in Europe, sovereign risk and concerns about government debt levels in some countries have spilled over into the banking system, raising the cost of borrowing for affected banks and depressing their market capitalisation. The heightened credit risk has spread to nearly a half of the €6.5 trillion stock of government debt issued in the region. This has resulted in rising spreads on government borrowing in a number of European countries. as the European banking system is highly interconnected, banks are exposed both to the direct risk of holding government debt as well as the indirect risk in lending to banks that hold risky sovereign debt. in addition, sovereign downgrades and perceived erosion of government guarantees to the banking sector, has resulted in rating agencies downgrading ratings for a number of banks. The European debt crisis has generated some €300bn in credit risk for European banks according to imF analysis. This figure is not a measure of banks’ capital needs, but rather it approximates the sovereign credit risk experienced by European banks. The imF analysis suggests that EU banks’ exposure to greek sovereign debt amounts to around €60bn. Exposure to sovreign debt in ireland and Portugal amounts to some €20bn. as governments in belgium, italy and Spain have also come under pressure, the total spillover including these countries probably amounts to around €200bn. including effects from the fall in bank asset prices in countries directly effected by increases in sovereign risk, adds an additional €100bn in credit risk of interbank exposures. The imF states that, although these estimates are based on market
4
assesments of credit risk, which may reflect a degree of overshooting, the underlying problems that they highlight are real. High-spread euro area systems have seen the most severe spillovers into their banking systems. a number of other banking systems such as those in Cyprus, Luxembourg, France and germany have experienced spillovers from the high-spread euro area to their foreign operations or cross-border exposures (Chart 8). although banks in the UK have a limited exposure to sovereign debt in high spread countries, they have large exposure to private sectors in these countries as well as indirect exposure to banking systems in France, germany and netherlands which have substantial exposures to vulnerable sovereign debt (Table 9). On 21 December 2011, the European Central bank (ECb) instituted the so called long-term refinancing operation (LTRO) - a programme of making low-interest loans with a term of three years in an effort to ease funding pressures on European banks facing large-scale redemptions. in total, 523 banks from 17 eurozone countries bid for €489bn in funding. by far the biggest amount of €325bn was loaned to banks in greece, ireland, italy and Spain. in this way the ECb tried to make sure that banks have enough cash to pay off €200bn of their own maturing debts in the first three months of 2012, and at the same time keep operating and loaning to businesses. in February 2012, the ECb held a second three year auction, providing eurozone banks with a further €530bn in low-interest loans. This second long term refinancing operation auction saw 800 banks take part.
www.thecityuk.com
banKing
(Table 3). The UK’s high ratio is a reflection of the international character of its banking sector, as nearly a half of its banking sector assets are foreign owned. This is a much higher proportion than in most other large European countries apart from Switzerland. Excluding the overseas element, the UK’s banking sector assets as a percentage of GDP are around the EU average. Other large European countries with a high ratio of banking sector assets to GDP include Ireland (759%) and Switzerland (548%) (Chart 7).
may 2012
Chart 8 Spillover from high-spread euro area sovereigns In % of assets Greece1 Cyprus Portugal1 Italy1 Spain1 Belgium1
Comparisons of bank profitability Pre-tax profits of the world’s largest 1,000 banks increased by over three-quarters in the 2010/11 financial year to $709bn from $401bn in the previous year. This was around 10% below the peak in profits in the two years preceding the credit crisis but represents the second successive year of strong growth. Average global return on capital (pre-tax profits to Tier 1 capital) increased to 13.1% in 2010/11, from 8.6% in the previous year (Chart 10).
Ireland1
Banks
Luxembourg
Sovereigns
France Germany Slovenia Netherlands UK 0
2
4
6
8
10
high spread country Source: IMF staff estimates 1
On a regional basis, profits of banks in the US increased by 194% in 2010/11, while those in the eurozone rose 84%. The Asia-Pacific region however accounted for the largest share of profits, 41% of the global total, up from 37% in the previous year. North America also saw an increase in its share to 20% from 14%. Western Europe saw its share decline to 25% from 31%. Most other regions also saw a decline in their share (Chart 9). According to The Banker, four of the top seven banks with the largest profits in 2010/11 were Chinese. US banks, JP Morgan Chase & Co, and Wells Fargo & Co were in 3rd and 6th place respectively. The UK’s HSBC Holdings was 4th with pre tax profits of $19bn. Barclays was the only other UK bank amongst the top 25. Emerging market countries led the rankings for average profit on capital with Pakistan, Brazil, Indonesia, Egypt and Argentina leading the way.
Shadow banking system The shadow banking system represents the system of credit intermediation that involves entities and activites outside the regular banking system. it includes for example hedge funds, money market funds and structured investment vehicles. Like traditional banks, shadow banks provide credit and liquidity but, unlike their traditional counterparts, they do not have access to central bank funding or deposit insurance. The shadow bank function is important because by providing funding to traditional banks it facilitates credit availability to businesses. However, as shadow banks do not take traditional deposits, they are subject to less regulation than traditional banks. assets in the shadow banking system grew rapidly before the credit crisis, reaching $60 trillion in 2007, double their total four years earlier and around half the size of banking sector assets. Since then, assets have remained at around the $60 trillion level. The US had the largest share of assets in 2010 with 46% of the total. it was followed by the UK (13%), Japan (8%), netherlands (8%), France (6%) and germany (5%).
Chart 9 Regional breakdown of pre-tax profits % 40 35
2010/11
30
2009/10
25 20 15 10 5 0
Asia pacific
North Middle Africa America East Western Latin Eastern Europe America Europe Source: www.thebankerdatabase.com
Chart 10 Return on capital and assets in all banks % profits / Tier one capital
% profits / assets
25
20
1.2
1.0
Return on assets
0.8 15 0.6
The regulation of the shadow banking system is under review internationally under the auspices of the Financial Stability board, with the goal of putting in place an appropriate system-wide oversight framework to identify and assess risks on a continuous basis. in the US, the Dodd-Frank act made provisions by stipulating that the Federal Reserve would have the power to regulate all institutions of systemic importance. Other provisions include for example new registration requirements for hedge funds. in the EU, the European Commission has published a Communication on Shadow banking. Recommendations for g20 leaders on regulating shadow banks are due to be finalised by the end of 2012.
www.thecityuk.com
Return on capital
10
0.4
5
0
0.2 0.0 2000
2002
2004
2006
2008
2010
Source: The Banker
5
may 2012
banKing
Loan-to-deposit ratios Table 4 Regional cost-to-income ratios are an important indicator of liquidity. % change Average costto-income ratio (%) operating costs Banks with lower loan-to19.1 49.7 Africa deposit ratios are in a 19.3 55.2 Asia-Pacific 4.6 36.6 Caribbean much stronger position 10.5 44.6 Eastern Europe as they rely more on 1.0 55.1 Western Europe 12.7 61.7 America deposits than wholesale Latin 9.4 41.4 Middle East 8.8 63.3 markets to fund lending North America www.thebankerdatabase.com Source: activities. Banks in Western Europe have the highest loan-to-deposit ratios in recent years, averaging 125.4% in 2010/11. This means that these banks were more dependant on wholesale capital markets to fund lending activities than banks from other regions (Chart 11). Loan to deposit ratios averaged 116.8% in Central Asia, and 110.2% in Eastern Europe. Of countries with large banking sector assets, China had the lowest ratio, with loans on average at two-thirds the value. Ireland and Netherlands on the other hand had the highest ratios with over 200% each. The UK ratio is lower than in most other large countries apart from Germany, having fallen from 123.7% to 102.0% in the five years to 2011. The cost/income ratio is another important indicator of banking efficiency, measuring banks’ operating costs as a proportion of total income. The lower the ratio the more efficient the bank is deemed to be. In the run up to the crisis a ratio of 40% was a common target. The average global costto-income ratio had rapidly deteriorated at the outset of the crisis. More recently, however, there has been a recovery and the average global ratio stood at 67% in 2010/11. Regionally, the cost-to-income ratio was lowest in the Middle East (41%). Asia and Eastern Europe had cost-to-income ratios of around 50%, followed by Latin America and Western Europe (Table 4). The North American banking sector was less efficient on this measure with a ratio of 63%. The Japanese sector had the highest ratio of the large countries with 128%. Luxembourg, Qatar and the United Arab Emirates has the best costto-income ratio, all below 30%. Of the large countries, China had the lowest ratio at 39%.
Chart 11 Bank loan-to-deposit ratios % 150 Euro area
120
UK
90 US
60
2006
2007
2008
2009
2010
2011
Source: IMF
Chart 12 International bank lending flow $bn, exchange rate adjusted changes in value outstanding 3,000 2,500 2,000 1,500 1,000 500 0 -500 -1,000 -1,500 -2,000 -2,500
2001 2003 2005 2007 2009 2011 2002 2004 2006 2008 2010 Source: Bank for International Settlements
Chart 13 Origin of cross-border transactions
Cross-border banking % share of total, September 2011
International lending and borrowing Bank for International Settlements (BIS) estimates that the total outstanding value of cross-border lending was $31,682bn as at end-September 2011. The $91bn increase in gross international claims of BIS reporting banks in Q3-2011 (Chart 12) was exclusively caused by an increase in interbank claims. By contrast, claims on non-banks recorded their largest decline since the fourth quarter of 2009. The increase followed quarterly rises of $1,253bn and $151bn in Q1 and Q2. This was the first occasion there have been three consecutive quarters in which lending has increased since the start of the economic downturn. There were however signs of a slowdown in Q3 as cross-border lending to non-banks in all major developed areas apart from Japan contracted or remained more or less unchanged. Also, cross-border claims on emerging market countries declined for the first time in 10 quarters.
6
Borrowing 21
Lending 19
UK
13 4 6 8 5
US
11
Japan
10
Germany
9
France
8
Netherlands
4
2
Hong Kong
3
2
Luxembourg
3
39
Others 35 30 25 20 15 10 5 0
5
26
0 5 101520253035
Source: Bank for International Settlements
www.thecityuk.com
banKing
may 2012
basel iii
Chart 14 Basel III - implementation
banks are facing an important regulatory challenge in the coming years. basel iii is a global regulatory standard on bank capital adequacy, stress testing and market liquidity risk agreed upon by the members of the basel Committee on banking Supervision in 2010/11. it was developed in response to the deficiencies in financial regulation revealed by the recent financial crisis with the goal of promoting a level global playing field with regard to capital, leverage, and liquidity regulations.
% (build up of common equity and conservation buffer) 15
Tier 1 Equity Capital Conserv. Buffer Min Common Equity
12
basel iii will require banks to hold 4.5% of common equity (up from 2% in basel ii) and 6% of Tier i capital (up from 4% in basel ii) of risk-weighted assets. basel iii also introduces additional capital buffers: a mandatory capital conservation buffer of 2.5% and a discretionary countercyclical buffer, which allows national regulators to require up to another 2.5% of capital during periods of high credit growth. in addition, basel iii introduces a minimum 3% leverage ratio and two required liquidity ratios. The Liquidity Coverage Ratio requires a bank to hold sufficient high-quality liquid assets to cover its total net cash outflows over 30 days; the net Stable Funding Ratio requires the available amount of stable funding to exceed the required amount of stable funding over a one-year period of extended stress.
6.00 6.00
9
6.00 5.00 5.50
6
6.00
4.50
6.00 1.88 2.50
0.63 1.25
Min existing Tier 1 plus Common Equity
4.00
3 2.00
0
3.50 4.00 4.50 4.50 4.50 4.50 4.50 4.50
2012
2014
2016
2018
Min existing Common Equity
2020
Source: Basel Committee on Banking Supervision
an OECD study released in February 2011 estimates that the medium-term impact of basel iii implementation on gDP growth is in the range of −0.05 to −0.15 percentage point per year. Economic output is mainly affected by an increase in bank lending spreads as banks pass a rise in bank funding costs, due to higher capital requirements, to their customers. With the core basel iii framework being adopted by authorities, the focus of attention is shifting towards implementation. The transition is due to start in 2013 with a gradual move to basel iii bank regulations over the coming years (Chart 14).
Chart 15 Largest banks by market capitalisation $bn market capitalisation, $bn, end-2011 Ind. & Com.Bank of China China Construction Bank Wells Fargo
The UK, with 19% of international bank lending in September 2011 (Chart 13), was the largest single market for cross-border banking business; its share slightly up from the previous year. The US, with 11%, had the second largest share. Elsewhere, market share remained relatively stable with offshore banking centres retaining around a fifth of banking flows. The most important borrowers in the global lending market are industrialised countries. The UK had the largest share with 21% of the total, followed by the US with 13%, and France with 8%.
HSBC Agricult. Bank of China JP Morgan Chase Bank of China Itau Unibanco Citigroup Inc. Commonw. Bank of Austral. 0
The international character of the UK market for cross border lending is reflected in the range of countries represented there and the spread of currencies. The most active banks in cross border banking operating in the UK are UK-owned, followed by German, Swiss and US banks. The dominant currencies are the US dollar and euro, each with around 40% of cross border lending, followed by sterling with 7%. Number of foreign banks Statistics on the number of foreign banks reveal that London remains the most popular centre with 251 foreign banks located there in March 2011. The next most popular location was New York, with around 200 foreign branches and representative offices. The smaller number of foreign banks in New York is largely an indicator of the nature of the US banking industry which is more oriented towards serving the domestic market.
Largest global banks The largest 25 banks list is dominated by Western banks and a few Japanese and Chinese players. In terms of Tier 1 capital, Bank of America
www.thecityuk.com
50
100
150
200
250
Source: www.banksdaily.com
Table 5 Largest banks in the world Ranking
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Previous (1) Bank of America Corp US (2) JPMorgan Chase & Co US (5) HSBC Holdings UK (3) Citigroup US (11) Mitsubishi UFJ Financial Group1 Japan (7) Indust. Comm. Bank of China China (6) Wells Fargo & Co US (15) China Construction Bank Cor. China (14) Bank of China China (4) Royal Bank of Scotland UK (8) BNP Paribas France (10) Barclays UK (9) Banco Santander Spain (28) Agricultural Bank of China China (13) Credit Agricole France
$bn, 2010/11 Assets Tier 1 capital 2,265 163.6 2,118 142.4 2,455 133.2 1,914 126.2 2,481 119.7 2,032 113.4 1,258 109.4 1,632 95.8 1,580 94.6 2,275 91.6 2,671 83.8 2,331 81.0 1,628 79.3 1,561 77.4 2,314 76.1
3/2011 Source: The Banker
1
7
may 2012
banKing
and JP Morgan Chase & Co claimed the top two spots for the second year running (Table 5). The UK’s HSBC Holdings climbed from 5th to 3rd place during the year. Other UK banks to appear amongst the top 25 include the Royal Bank of Scotland in 10th place (4th place in the previous year), Barclays 12th (10th) and Lloyd’s Banking Group 18th (12th). Countries with most banks among the Top 1000 were US 192 (up from 183), China 111 (84), Japan 105 (102), Germany 40 (72), UK 29 (22). Chinese banks are steadily increasing in size with three banks in the top 10 in the latest rankings.
Investment banks’ revenue slightly down in 2011 to
$70.3bn
Chart 16 Global investment banking revenue $bn, revenue 100 90
In terms of market capitalisation Industrial and Commercial Bank of China and China Construction Bank held the top two spots with market capitalisation of over $190bn each at the end of 2011 (Chart 15). They were followed by Wells Fargo and HSBC. A further two banks from China appear in the top 10 rankings. A decade earlier, the rankings were dominated by banks from the US and UK.
80 70 60 50 40 30
Banks’ business has become more global, facilitated by the reduction in barriers to international trade and technological developments. The share of assets of the largest ten global banks grew to 23% in 2010/11 from 15% a decade earlier. The US market is more concentrated than most other regions. The top six banks in the US accounted for around a half of US banking sector assets, more than twice the corresponding share of EU banks. The top 10 banks in the US accounted for 56% of overall assets, compared to 35% in the EU (Table 3). Further consolidation is likely, especially in Continental Europe with the banking sector in Germany, France and Italy being more fragmented than in the UK. Competition has been intensified by new players such as internet banks and institutions whose parent companies are not part of the traditional banking sector such as supermarket banks and insurance companies.
20 10 0 2001 2003 2005 2007 2009 2011q1 q2 q3 q4 q1 2011 2012 Source: Dealogic
Chart 17 Investment banking revenue, by world region $bn, announced deals
100 90
13%
14%
23%
35%
26%
20%
80 70
INVESTMENT AND PRIVATE BANKING
60
Size of the investment banking industry
40
38%
39%
26%
50
30
Global investment banking revenue totalled $70.3bn in 2011, down slightly on the previous year (Chart 16). Fee revenue of $42.1bn generated during the first half of 2011 represented the strongest start to a year in four years. Business activity however slowed since then.
49%
20
47%
44%
2008
2009
51%
54%
2010
2011
10 0
2007
Americas
The US accounted for 45% of total investment banking revenue in 2011, its highest share in five years. EMEA (Europe, Middle East, Africa) showed a decline during this period to 26% from 38%. Asia’s share also declined in 2011 to around a fifth of the total. This was however nearly double its share four years earlier (Chart 17).
Source: Dealogic
Companies in the UK, were the source of $3.3bn of global revenue (Table 6), down 15% on the 2010. This represented around 4.6% of global fee revenue making it the fourth largest market behind the US, China and Canada. Although the UK was the source of around a fifth of European investment banking fee revenue, around a half of European investment banking activity was conducted through London. The majority of investment banks are either headquartered or have a major office there. The largest international banks in the UK each employ several thousand people.
1 2 3 4 5 6 7 8 9 10
8
21%
EMEA
Asia Pacific
Table 6 Investment banking revenue by nationality 2011 United States China Canada UK Japan Germany France Australia Italy Spain Others Total Source: Dealogic
Fee revenue ($m) 31,836 4,568 4,288 3,260 2,767 2,511 2,502 2,331 1,309 1,294 13,676 70,342
% share 45 7 6 5 4 4 4 3 2 2 18 100
annual % change 5 -20 10 -15 -28 2 11 15 49 -6 -2 0
www.thecityuk.com
banKing
As market conditions improve, investment banks will not be able to rely to the same extent on fees generated by financial restructuring. Regulatory changes may bring stricter conditions with respect to capital costs. On the other hand, a low interest rate environment, along with an increase in corporate confidence and less volatile markets, should help to facilitate a pickup in M&A activity. China and other Asian countries as well as sovereign wealth funds from the Middle East are likely to become a more important source of investment banks’ business in the coming years.
may 2012
Chart 18 Investment banking revenue product breakdown global, % share 100 30%
80
23%
ECM
24%
Syndicated loans
60
16%
40
28%
26%
DCM
25%
27%
M&A
2010
2011
Investment banks’ business Most investment banks' work is undertaken on behalf of large companies, banks and government organisations with some also providing a service to wealthy individuals. A number of investment banks, particularly from the US, have expanded into the retail sector while at the same time some commercial banks through mergers and acquisitions have increased their presence in investment banking. Investment banks' business can broadly be categorised into: corporate finance and advisory work, treasury dealing, investment management and securities trading. Only a few investment banks provide services in all these areas. Most others tend to specialise to some degree and concentrate on a few product lines. A number of banks have diversified their range of services by developing businesses such as proprietary trading, servicing hedge funds or making private equity investments.
20
0
Source: Dealogic
Chart 19 Global M&A activity $bn, announced deals
5,000
UK Other Europe
4,000
Product breakdown Equity underwriting, fixed income underwriting, mergers and acquisitions (M&A) and syndicated loans business each accounted for around a quarter of total fee revenue in 2011 (Chart 18). -
-
-
M&A advisory had been the main source of fee income globally in the decade prior to the current economic slowdown. Its share has however, fallen compared to years immediately preceding the credit crisis, while other areas of investment banking have increased. Fees from M&A advisory work totalled $19.2bn, or 27% of total fee revenue in 2011, up on 25% in the previous year. Announced corporate M&As increased by 2% in 2011 to $2.80 trillion. This was the highest level of activity in three years but well down on the peak in 2007 (Chart 19). The US accounted for 36% of the total, Europe 29%, Asia Pacific (excluding Japan) 19%. Real estate was the leading sector for global M&As in 2011, accounting for 10% of activity. Oil and gas, finance, utility and energy, healthcare and technology were the next most important sectors. Despite a decline of nearly 10% during the year in activity, the UK was the most targeted nation in Europe in 2011 with $137bn. M&As were also the leading source of fee revenue of UK investment banking business (Chart 20). Equity underwriting (ECM) generated around $16bn or 23% of investment banks’ fee revenue in 2011. This was down from 30% in 2010, as the IPO market slowed in the second half of the year. Fixed income underwriting (DCM) accounted for 26% of total investment banking fee revenue in 2011 or around $18bn. This was down on its 28% share in the previous year.
www.thecityuk.com
Other
3,000
2,000
1,000
0
2003 2005 2007 2009 2011 2001 2002 2004 2006 2008 2010
Source: Dealogic
Chart 20 UK investment banking revenue by product % share 100 23%
ECM
24%
Syndicated loans
26%
DCM
27%
M&A
30% 80 16% 60 28% 40
20
0
25%
2010
2011
Source: Dealogic
9
may 2012
banKing
Table 7
Chart 21
Largest investment banks 2011 1 2 3 4 5 6 7 8 9 10
JP Morgan Bank of America Merrill Lynch Goldman Sachs Morgan Stanley Credit Suisse Deutsche Bank Citi Barclays Capital UBS Wells Fargo Securities Source: Dealogic
Investment banking revenue - by industry Revenue Market $m share
Debt %
Equity %
Loans %
M&A %
8.1 7.4 5.7 5.6 5.1 5.1 4.6 3.9 3.3 2.4
24 24 22 22 26 32 32 34 26 25
19 18 23 29 24 21 21 19 25 16
30 37 11 13 18 18 26 23 11 54
27 21 43 36 32 29 21 24 38 6
5,663 5,198 4,005 3,955 3,590 3,564 3,213 2,771 2,342 1,662
Annual change % 6 8 -5 -2 -2 -3 4 3 -15 32
source of revenue, global % share, 2011
Financial institutions Other 18% Healthcare
7% 7%
Technology
20%
Syndicated loans generated 24% of global investment banking fee revenue in 2011, up from 16% in 2010. A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment banks known as arrangers.
Sector breakdown Despite a one-fifth drop in fee revenue to $15.4bn, companies in the financial sector have consistently been the source of the highest share of investment banks’ business over the past decade both globally and in the UK (Charts 21 and 22). Its 22% global share was ahead of energy and natural resources (20%), industrials (15%), which both saw a 6% increase in revenue to $14.1bn and $10.8bn respectively. Other fee generating industries included consumer and retail (10% of total) and technology and healthcare (7% each).
Largest investment banks The credit crisis has had a profound effect on the investment banking sector. Several investment banks failed, were bailed-out by governments, or merged since the start of the economic downturn. While the specific circumstances varied, in general the decline in the value of mortgagebacked securities held by these companies resulted in either their insolvency or inability to secure new funding in the credit markets. In 2011, JP Morgan and Bank of America Merrill Lynch led the rankings of the largest investment banks, each generating more than $5bn in fee revenue (Table 7). The largest banks’ capital resources enable them to offer a broad product range supported by strong international distribution networks. The smaller players typically focus on particular products or regions. In 2011 the largest ten global investment banks generated 51% of global investment banking revenue (Chart 23). This was down from 58% four years earlier. Consolidation in Europe has created larger investment banks, although these are still not as big as their US counterparts.
Private banking
15% Industrials Total: $70.3bn
Source: Dealogic
Chart 22 UK investment banking revenue - by industry source of revenue, % share, 2011
10
Financial institutions
Other 18%
Business services
22%
7% Transportation
7% 10%
Industrials
20% Energy & natural resouces
15% Consumer & retail
Total UK fee revenue: $3.3bn Source: Dealogic
Chart 23 Global investment banking, concentration % share 100 90 80
42
Others
49
Next 5
19
Top 5
32
70 60 50
23
40
Assets under management of private banks increased by 11% in 2010 to $17.1 trillion. This was the second successive year of growth, but still slightly below the peak of $17.4 trillion in 2007 (Chart 24). Average income was up 9% during the year while profits increased by 15.5%. Private banks with the highest gross margins since the start of the credit crisis were those with strong deposit and lending capabilities. Regulatory changes in the wider banking industry may bring tighter scrutiny on private banking
Energy & natural resources
10% Consumer & retail
-
22%
30 20
35
10 0
2007
2008
2009
2010
2011
Source: Dealogic
www.thecityuk.com
banKing
business, particularly offshore business which accounts for around a third of private banking business.
may 2012
Table 8
Chart 24
Largest private banks
Global private banking industry
Assets under management, end-2010 1 2 3 4 5 6 7 8 9 10
Bank of America Morgan Stanley UBS Wells Fargo Credit Suisse Royal Bank of Canada HSBC Deutsche Bank BNP Paribas JP Morgan Other Total
$bn 1,945 1,628 1,600 1,398 865 435 390 369 340 284 7,846 17,100
% share 11.4 9.5 9.4 8.2 5.1 2.5 2.3 2.2 2.0 1.7 45.9 100.0
The large number of high net worth individuals (NWI) around the world provide opportunities for a wide range of firms and institutions that deliver Source: Scorpio Partnership services to this community. The latest Merrill Lynch/Cap Gemini Ernst & Young’s annual World Wealth Report estimated that the value of funds managed on behalf of 10.9 million high NWIs with over $1m of investable worldwide assets increased by 9% in 2010 to a record $42.7 trillion (Chart 25). The US, Japan and Germany accounted for 54% of the world’s high NWI population. BCG, in its annual report Global Wealth 2011, estimated that the total value of assets managed on behalf of all investors increased by 9% in 2010 to $121.8 trillion, following a 21% increase in the previous year. Investment of private wealth is located either in onshore or offshore centres. The main centres for onshore investment are the major financial centres of the world, notably London, New York, Singapore, and Hong Kong. Key offshore centres also include Switzerland, the largest, as well as Luxembourg, the Channel Islands, Bermuda and the Cayman Islands.
Assets under management, $ trillion
18 16 14 12 10 8 6 4 2 0
2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Scorpio Partnership Ltd
Chart 25 Global private wealth value of assets, $ trillion 120
All investors (BCG)
100 80 60 High net worth individuals (MLCG)
Largest private banks The private banking market is relatively fragmented with many medium sized and small players. It is however heavily concentrated at the top end with the largest four private banks accounting for nearly 40% of global assets under management at the end of 2010 (Table 8). Banks from Switzerland and the US feature high in the rankings. Bank of America had the most assets under management, followed by Morgan Stanley, UBS and Wells Fargo. HSBC and Barclays are the only UK banks to feature in the ‘Top 20’ list, although all of the largest private banks have a substantial presence in London.
40 20 0
2000
2002
2004
2006
2008
2010
Source: The Boston Consulting Group (BCG) Merrill Lynch Capgemini (MLCG)
Chart 26 Islamic finance
Islamic banking The global market for Islamic financial services, as measured by sharia compliant assets, grew by 21% in 2010 to $1,131bn. Assets are likely to have grown a further 14% in 2011 to reach $1,289bn, making a rise of approximately 150% from $509bn in five years since 2006. The largest centres remain concentrated in Malaysia and the Middle East, including Iran, Saudi Arabia, UAE, Kuwait, Bahrain and Qatar. Islamic commercial banks accounted for the bulk of the assets with investment banks and funds making up most of the remainder (Chart 26).
Banking, takaful & fund assets, $bn, end-2010
UK Turkey 19 28 Qatar
Others 83
50
Bahrain
Kuwait
Iran
56
388
69
93
UAE
Islamic finance has shown resilience during the past two years at a time when global recovery has slowed and conventional banking in Western countries has remained under pressure. It is not unaffected by broader global macroeconomic problems with some Islamic banks exposed to the volatile real estate markets. In the Middle East, especially the Gulf, Islamic
www.thecityuk.com
120
Malaysia
148
S.Arabia
Banking, takaful & fund assets total: $1,086bn Source: The Banker
11
may 2012
banKing
finance has benefitted from economic and financial stability, despite political unrest in a few countries. Banks account for the bulk of the assets globally with funds and takaful making up the balance. Banks and funds are major investors in sukuk, which strengthened in 2011: issuance was up 60% to a record $84bn, of which two thirds was from Malaysia.
Chart 27 Bank leverage %, adjusted tangible assets to Tier 1 common capital 35 30
Euro area
25
Considerable potential exists for expansion of Islamic finance with The Banker estimating that only 12% of Muslims worldwide use Islamic financial products. The extent of the industry’s penetration varies substantially. In Bangladesh, for example, Islamic banking accounts for 65% of total banking assets while in Indonesia its share is only 4%.
UK 20 US 15 10 5
The UK is the leading Western country and Europe’s premier centre with $19bn of reported assets, largely based on HSBC Amanah. London’s profile as the leading Western centre for Islamic finance has grown in recent years, although institutions in the UK have been providing Islamic financial services for 30 years. An important feature of the development of London and the UK as the key Western centre for Islamic finance has been supportive government policies intended to broaden the market for Islamic products. There are 22 banks in the UK that have set up windows to provide Islamic financial services. Five of these are fully sharia compliant, more than in any other Western country.
0
2006
2007
2008
2009
2010
2011
Source: IMF
Table 9 Major UK banks exposure to euro-area countries End-Q3 2011 (£bn)
THE UK BANKING INDUSTRY
Sovereigns
Greece Portugal Italy Spain Ireland Total vulnerable Europe
The UK is the leading centre for international banking and home to several of the largest global banks. International banks hold nearly half of UK banking assets while UK owned banks have over half of their assets outside the country. Some UK banks faced major challenges during the financial crisis due to a range of factors including over exposure to sub-prime securities, debts from mortgage lending arising from the decline in the property market, and over dependence on wholesale money markets to fund lending. Banks have however made significant progress in repairing their balance sheets, improving their capital and funding and have reduced their reliance on the official sector for liquidity support.
1.3 1.1 5.5 3.9 3.0 14.8
7.4 15.0 39.3 59.7 87.9 209.2
60.8 44.8 46.2 3.6 318.4
176.9 147.7 104.6 11.4 649.8
90.0 36.7 20.8 3.8 182.7
France 26.2 Germany 66.1 Netherlands 37.6 Belgium 4.0 Total 148.7 Source: BIS, TheCityUK estimates
Total
Banks Non-bank private sector 5.4 0.6 11.8 2.1 28.8 5.0 43.6 12.2 73.4 11.5 163.0 31.4
Chart 28 UK resident banks lending
UK banks exposure to sovereign debt in Greece, Portugal, Italy, Spain and Ireland totalled close to £15bn at the end of Q3-2011. However, UK banks have large exposures to the private sectors in these countries of over £190bn. This was considerably less than for example France and Germany, which had exposures to the vulnerable euro-area of over £400bn and £300bn respectively and more than four times the UK holdings of sovereign debt. The capital positions of banks in the UK have improved in 2011. UK banking sector leverage has decreased sharply from a multiple of over 40 times in 2008, to just over 20 times in 2011 (Chart 27). Bank leverage is set to decline further as banks transition to higher capital requirements under Basel III. The Financial Services Authority (FSA) has also imposed stringent capital regulations, liquidity regulations and risk management practices. The FSA plans to phase in the new regime in several stages, over several years.
12
quarterly % change 25 20 15
Lending to households
10 5 0 -5
Lending to PNFCs
-10
2001 2003 2005 2007 2009 2011 sterling loans to the household sector 2 All currency loans to private non-financial corporations (PNFCs) Source: Bank of England, TheCityUK calculations 1
www.thecityuk.com
banKing
may 2012
independent Commission on banking
Chart 29
On 16 June 2010, the Chancellor of the Exchequer announced the creation of the independent Commission on banking. The Commission was asked to consider structural and related non-structural reforms to the UK banking sector to promote financial stability and competition, and to make recommendations to the government by the end of September 2011.
value of assets, $ trillion 9,000 Foreign banks 8,000 UK banks
The final recommendations focused on creating a more stable and competitive basis for UK banking for the long-term. according to the Commission, more stable banking requires a combination of measures. it requires that UK banks should have more equity capital and loss-absorbing debt – beyond what has been internationally agreed – and that their retail banking activities should be structurally separated, by a ‘ring-fence’, from wholesale and investment banking activities. The Commission has said that only ‘ring-fenced’ banks would supply the core domestic retail banking services of taking deposits from ordinary individuals and SmEs and providing them with overdrafts. Ring-fenced banks could not undertake trading or markets business, or do derivatives (other than hedging retail risks) or supply services to overseas customers (in the sense of nonEuropean), or services (other than payments services) resulting in exposures to financial companies. Other activities, such as lending to large domestic nonfinancial companies, would be allowed either side of the fence. The large ‘ringfenced’ banks should have equity capital of at least 10% of risk-weighted assets and corresponding limits on overall leverage. On 19 December 2011 the government published its response to the iCb report. This response agrees with the iCb’s recommendations and outlines how the government will legislate to create a stable banking sector that supports lending to businesses and families, and removes the implicit taxpayer guarantee in the event of a bank failure. The government will implement the iCb’s advice in stages with the full package of reforms completed by 2019.
UK banking sector assets
6,000 5,000 4,000 55% 3,000 2,000 1,000 45%
52%
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1 data for 2010 & 2011 is not entirely comparable to previous years due to the inclusion of figures for building societies Source: Bank of England, TheCityUK calculations
Chart 30 Foreign owned UK banking sector assets % share by country, 2011 (2010)
Other
EU
30% (30%)
Deposits have grown faster than loans since 2009, narrowing the funding gap (customer lending not financed through customer deposits, Chart 31). Credit availability however remained constrained in the UK during 2011, in common with other developed countries. The total amount of lending to the UK corporate sector was down during the year, while lending to households increased slightly (Chart 28). A bank levy on wholesale funding was introduced by the UK Government to encourage prudent behaviour by banks. The levy was set at 0.04% of banks’ liabilities in 2011, rising to 0.07% in 2012. The objectives of the levy are to encourage banks to move to a less risky funding profile lessening reliance on short-term wholesale funding, and to exact a price from banks and institutions for the risks which they pose to the wider economy due to their size, reflecting their too big to fail status.
Assets of the UK banking sector totalled a record £8,119bn at the end of 2011, up 3% on the previous year’s total (Chart 29). In 2011, domestic banks held 52% of overall banks’ assets. The 48% foreign ownership of the remaining assets was a higher proportion than in most other large countries. EU banks’ share of foreign owned UK banking sector assets declined to 38% in 2011 from 48% in the previous year. During this time the share of US banks increased from 18% to 27%. Other regions’ share remained roughly unchanged (Chart 30). Data for 2010 and 2011 is not entirely comparable to previous years due to a change in methodology and the inclusion of figures for building societies
www.thecityuk.com
48%
7,000
38% (48%)
27% (18%) Japan 5% (4%)
US
Total: $3,861bn Source: Bank of England, TheCityUK calculations
banks’ assets and liabilities Over a half of banks assets are held in lending. banks’ other assets consist of a small amount of cash to meet normal deposit withdrawals; short term or easily realisable bills (both Treasury and commercial), investments, claims under sale and repurchase agreements. around 90% of banks’ liabilities consist of sight and time deposits. around a fifth of deposits are held in repos, certificates of deposit, short-term paper and acceptances. The remaining liabilities are primarily made up of non-deposit funds such as shareholder capital and accumulated reserves.
13
may 2012
BANKING
251 foreign banks
government support to UK banks Since 2007, the UK Treasury has made a series of interventions to support the financial stability of UK banking. These interventions supported the broad aims of protecting depositors; maintaining liquidity and capital for UK banks; and encouraging banks to lend to creditworthy borrowers. The most recent estimate (31 march 2011) published by Hm Treasury for current level of support provided to banks, shows a total of £456bn (including a cash outlay of £124bn and guarantee commitments of £332bn). This was significantly down from the peak level of £1,162bn (including support that was made available but not used by a specific institution). This is because some support schemes have closed to new entrants without being used; some of the guaranteed debts and assets in the schemes have matured and been repaid; some guarantees to bank depositors and wholesale funders have been removed; and banks have started to repay some of the Treasury loans. banks participating in the support schemes have continued to make progress towards exiting from the support schemes during 2011. although the banks are ahead of schedule in repaying official liquidity support, the UK government retains large stakes in the financial sector after having injected a cumulative total of over £70bn into several banks, including taking ownership of 41% and 83% of the total share capital of Lloyds banking group and the Royal bank of Scotland as well as nationalising northern Rock and bradford & bingley. in november 2011 it was announced that Virgin money was going to buy northern Rock plc for £747 million.
in bank assets figures in 2011. Building societies are mutual organisations owned by their members and therefore have no external shareholders. Their main business activity is mortgage finance. At end-2011, there were 52 building societies with total assets under management of £330bn.
located in the UK Table 10 Number of banks in the UK End- March Incorporated in the UK UK owned Foreign owned [1] Incorporated outside the UK UK branch of an EEA firm [2] UK service of an EEA firm Outside the EEA [3] Total authorised banks Foreign banks physically located in the UK [1]+[2]+[3]
2000 189 112 77 242 115 --127 369
2009 159 71 88 166 82 5 79 325
2010 156 70 86 162 79 7 76 318
2011 157 72 85 192 86 26 80 323
319
249
241
251
Source: Bank of England, Financial Services Authority
Chart 31 Major UK banks customer funding gap £bn, customer lending not financed Customer funding through customer deposits (bars) gap as % of loans (line) 900
30
800 25 700 600
20
500
Number of banks The UK banking sector consists of UK incorporated banks and foreign banks operating in the UK. UK incorporated banks The number of UK incorporated banks declined to 157 in 2011 from 189 a decade earlier (Table 10). This was due to a fall in the number of UK-owned incorporated banks. During this period the number of foreign owned UK incorporated banks increased from 77 to 85. UK incorporated banks consist of UK and foreign owned banks authorised by the Financial Services Authority (FSA) under the Financial Services and Markets Act 2000 (FSMA). These mainly include commercial banks, investment banks, branches of foreign owned banks and banks operated by retail companies. Foreign banks in the UK London is a major centre for international banking and many foreign banks have located branches and representative offices there. At at the end of March 2011 there were 251 foreign banks that were physically located in the UK, with the majority of these located in the City of London. Most of these banks were from Japan, Germany, US, Italy and Switzerland.
Lending Bank lending can be subdivided into advances, which account for around two-thirds of sterling lending, and market loans which account for most of overseas lending. The outstanding value of total lending totalled £5,196bn at the end of 2011, up 4% on the previous year.
15 400 300
10
200 5 100 0
0 2005 2006 2007 2008 2009 2010 2011-1H
Source: Bank of England, TheCityUK calculations
Chart 32 Industrial breakdown of lending % share end-2011, UK resident bank lending Other Individuals
Manufacturing,2% Real estate
9% 9% 47%
33% Financial intermediation
Total: £2,427bn
Source: Bank of England, TheCityUK calculations
UK banks have gradually increased the resilience of their funding positions
14
www.thecityuk.com
banKing
may 2012
in recent years by reducing their reliance on wholesale markets. In the years leading up to the credit crisis, major banks developed a growing reliance on wholesale money market funding in preference to traditional deposits from customers (Chart 31). In 2008 24% of customer loans or around £900bn was funded through wholesale money markets, much of this from overseas. This has fallen by over £600bn since then, to £273bn or 8.2% of customer loans at end 1H-2011. Personal lending Nearly a half of UK resident bank lending is targeted towards domestic customers. Over the past decade there has been a significant movement away from manufacturing and wholesale and retail trade towards personal lending, particularly mortgage lending. The outstanding value of mortgage lending has remained at record levels since the start of the economic downturn, and totalled £1,218bn at the end of 2011. There has however been a decline in the annual value of net lending for mortgage finance in recent years (Chart 33). A monthly trend analysis for 2011 shows a gradual improvement during the year. Corporate lending has seen a changing pattern in bank lending to companies both in the direction and maturity of lending over the past decade. Financial services increased its share of bank lending mostly at the expense of manufacturing and wholesale and retail trade while the maturity of lending has shortened. Foreign-owned banks account for around a third of lending to the corporate sector. Since 2005, UK companies have raised funds of £445bn from financial markets – including bank finance (£177bn), bonds (£10bn), stock markets (£208bn) and private equity (£51bn). The monthly flow of funds raised by UK business has decreased since the start of the economic downturn (Chart 34). This was not only the case with bank lending, but also with other sources of finance such as equity, bonds and commercial paper. Following a period of discussion between the UK Government and the major UK banks, known as 'Project Merlin', a statement was made by the banks in February 2011. As part of that, the banks stated a capacity and willingness to lend £190bn of new credit to business in 2011, with £76bn of this lending capacity allocated to small and medium-sized enterprises. The Bank of England aggregates and publishes the Merlin facilities data. Overall targets are being met or exceeded by all banks participating. Data for 2011 shows that gross lending facilities to SMEs totalled some £74.9bn during 2011 with gross lending facilities of £214.9bn (Table 11). The banks have also announced additional support of £1.2bn to support regional growth and the Big Society. Of this the banks will provide £200m of additional capital over two years to set up the Big Society Bank.
Chart 33 Mortgage lending by major UK lenders £bn 20
Other Remortgaging House purchase
15
10
5
0
2008
2009
2010
2011
Source: Bank of England
Chart 34 Net funds raised by UK businesses £bn, monthly net funds raised 40 30 20 10 0 -10 -20 -30 -40
2007
Loans
2008 Equity
2009
Bonds
2010
Commercial paper
Total
Source: Bank of England, TheCityUK calculations
Chart 35 External business of banks operating in the UK amounts outstanding, $bn 8,000 7,000 6,000
Overseas business A substantial proportion of UK bank lending is targeted towards overseas Table 11 customers. This is Lending to UK businesses by large UK banks1 largely due to the £bn, ‘Project Merlin’ data substantial presence of Q1 Q2 Q3 Q4 2011 foreign banks in the UK Gross lending facilities 47.3 53.0 57.4 57.2 214.9 of which and London’s role as a gross lending facilities to SMEs 16.8 20.5 18.8 18.9 74.9 major international includes Barclays, HSBC, Lloyds Banking Group, RBS financial centre. and Santander. Source: Bank of England External business of
2011
41%
5,000
Other
4,000 38% 3,000 2,000 Total developed countries
1,000 62% 0
59%
2004 2005 2006 2007 2008 2009 2010 2011
1
www.thecityuk.com
Source: Bank of England, TheCityUK calculations
15
may 2012
BANKING
Remuneration Remuneration is a key business issue and one that has been attracting considerable attention across all business sectors. banks, like many other businesses, have a policy of paying bonuses to reward staff for meeting objectives. The Centre for Economics and business Research (CEbR), estimates that £7.3 billion will be paid by the UK banking sector for remuneration purposes in 2012. This total is 4% lower than in 2011 and considerably less than the £11 billion paid before the financial crisis in 2007.
Chart 36 Industrial breakdown of deposits % share end-2011, UK resident bank deposits Other Manufacturing, 2% 9% Real estate 5%
42%
The Financial Services authority (FSa) has published a Remuneration Code that requires large banks, building societies and broker dealers in the UK to establish, implement and maintain remuneration policies consistent with effective risk management. The code specifies that it is expected that firms will not enter into contracts with individuals which provide guaranteed bonuses for more than one year. it is also expected that for senior employees two-thirds of bonuses will be spread over three years. TheCityUK is set to launch a ‘Fairness in Finance’ initiative to address this issue. This will seek to engage members of the public, consumer champions and business leaders to discuss what an effective and sustainable remuneration policy should look like.
banks operating in the UK fell sharply at the outset of the credit crisis but has remained fairly stable since then (Chart 35). Amounts outstanding totalled $6,029bn at the end of 2011 up 2% on the previous year but down from a peak of nearly $8,000bn in Q1-2008. The largest borrowers from banks in the UK were customers in the US with 19% of the total, followed by those in Switzerland with 9% and Germany 8% and France 4%. Deposits The outstanding value of deposits in UK banks totalled £7,261bn at the end of 2011. This was up 2% on the previous year due to growth in foreign currency deposits. Domestic banks accounted for 51% of total UK deposits at the end of 2011. The dependence of UK banks on domestic retail and corporate customers means that the majority of their funds are in sterling. Nevertheless, around 40% of domestic banks’ assets were held in foreign currency (Chart 37). This is because a large proportion of funds are handled on behalf of foreign customers through the wholesale markets. The main non-bank source of banks' domestic deposits are personal savings. Personal customers accounted for 42% of total deposits. ‘Other financial institutions’ (OFI) account for a further 42%. Real estate companies, insurance companies, pension funds and manufacturing companies generated most of the remainder. Other deposits, which cannot by their nature be attributed to individual sectors, consisted of certificates of deposit, other short-term paper and acceptances.
Financial intermediation
42% Individuals
Total: £2,340bn
Source: Bank of England, TheCityUK calculations
Chart 37 Deposits of UK and foreign banks % share, breakdown by currency Foreign banks
UK banks
100 17%
21% 46%
6%
75
50% 19%
50 77%
29%
27%
28%
60%
25
0
23%
1999
2011
Sterling
1999
2011
Euro
Other
Source: Bank of England, TheCityUK calculations
Chart 38 Net income £bn, annual total (Major British Banking Group)
50
40
40
30
30
20
20
10
10
Overseas banks located in the UK held slightly under a half of total UK deposits in 2011. Banks from EU countries, mostly from Germany, Switzerland and the Netherlands, held 38% of the foreign countries’ total. US banks held 27% and Japanese 5%. Since overseas banks are predominantly serving an overseas customer base only a quarter of their deposits were held in sterling (Chart 37).
Income Although no collective data on profits are published for the
0
0 -10
-10 Provisions Pre-tax profits/loss Net income
-20 -30
-20 -30 -40
-40 -50
2000
2002
2004
2006
2008
2010
-50
Source: British Bankers' Association
banking industry as a whole, aggregated data for the Major British Banks’
16
www.thecityuk.com
banKing
Group (MBBG) provides a good indication of overall trends. Financial results of the MBBG for 2010 show a net profit after operating expenses, of £45.8bn. This was the second successive year in which net profits exceeded £40bn and follows a net loss in 2008 of £7.9bn (Chart 38). The results of the UK’s largest banks in 2011 highlighted the difficult business environment for the lenders. Combined profits of five major banks in the UK (Barclays, RBS, LLoyd’s, HSBC and Standard Chartered) totalled around £18.9bn in 2011. This down from £22.2bn in the previous year, mainly a result of large one-off items, including the impact of provisions for Payment Protection Insurance claims and sovereign debt losses. Barclays Bank reported a statutory profit before tax of £5.9bn, HSBC £13.2bn and Standard Chartered £4.2bn. RBS and Lloyds on the other hand reported losses of £0.8bn and £3.5bn respectively. Competitive pressures have reduced net interest margins in most banks over the past decade. This is a result of new players entering the market, including non-financial services companies such as retailers and motoring organisations, and overseas firms. In the decade up to 2010, average net interest margins declined from 2.0% to 1.0% (Chart 39). Competition has resulted in considerable pressure on operating expenses which fell from 2.0% of total assets to 1.2% during this period. Cost reduction has been an important factor in making UK banks, which are among the most efficient in Europe, competitive internationally. UK banks benefit from a flexible labour market, technology investment, outsourcing and offshoring.
Largest UK banks The number of UK incorporated banks has been on a downward trend since the mid-1990s (Table 10) despite the conversion
Payments and settlements system The majority of transactions are still made in cash although the proportion is falling steadily. Technology has become increasingly important for the remaining transactions which include cheques, automated payments and plastic cards. The clearing process involves the transmission and settlement of payments between accounts held at different banks or different branches of the same bank. Payment systems can broadly be divided into clearing networks and plastic card networks. Clearing networks in the UK include: bankers automated Clearing Services (baCS) for direct debits, direct credits and standing orders; real time gross settlement which is cleared by the Clearing House automated Payments Scheme (CHaPS) and the Cheque and Credit Clearing Company (CCCL). Plastic card networks cover debit, credit and aTm cards. The number of non-cash transactions made in the UK including credit and debit cards, direct debits, standing orders and cheques has risen nearly threefold from 4.7bn in 1990 to 14.5bn in 2011. This was equal to an average of 230 transactions for each person in the UK during 2011. The value of cleared payments increased slightly during 2011 to £69 trillion (Chart 40). automated payments accounted for over three-quarters of the volume of transactions and 99% of the value of transactions. The number of cards in issue by banks totalled over 170m at the end of 2010 (Chart 41). Debit cards have become increasingly popular since their launch in 1987, reaching over 85m in 2010. both the number of debit card users and the number of payments made with each card are expected to grow. it is difficult to draw conclusions regarding the number of other cards in issue because of their dual functionality with, for example, many debit cards functioning also in aTms and for cheque guarantee.
www.thecityuk.com
may 2012
Chart 39 UK banks’ interest margins & operating expenses % of total assets (Major British Banking Group)
3.5 Operating expenses
3.0 2.5 2.0 1.5
Interest margins
1.0 0.5
1992 1996 2000 2004 2007 2010 1994 1998 2002 2006 2008
Source: British Bankers' Association
Table 12 Largest UK banks Tier one capital 133.2 94.1 83.8 73.8 34.3 17.0 11.7 4.1 3.7 3.2 2.4 2.0 2.0 1.5 1.3
$bn, end-2010 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
HSBC Holdings Royal Bank of Scotland Barclays Lloyds Banking Group Standard Chartered Santander UK Nationwide Building Society1 Clydesdale Bank2 FCE Bank The Co-operative Bank Yorkshire Building Society Investec Bank3 Schroders Standard Bank Coventry Building Society
Assets 2,455 2,275 2,331 1,552 517 474 294 70 22 71 47 30 21 31 35
4/2010; 2 9/2010; 3 3/2011 Source: The Banker
1
Chart 40 Value and volume of cleared automatic payments £ trillion, value of cleared payments (bars) 150
120
90
60
30
0
2001
2003
2005
2007
2009
2011
Source: Payments Council
17
may 2012
BANKING
Electronic delivery channels Electronic delivery channels include aTms, internet banking, corporate electronic banking, interactive TV and mobile telephone banking. The rapid rise of internet services and mobile applications have made electronic delivery channels a key priority area for banks. according to Celent, global banking sector iT spending will grow by 2.8% in 2012 to $173bn. Online banking is expected to be the fastest growing area, with spending rising 5.3%, followed by mobile telephone banking (5%). The percentage of funds allocated to maintenance is slowly declining while new technology investments are rising. Financial services firms are expected to put greater emphasis on innovation in the future to boost customer trust, increase sales and improve services offerings. ATMs Parallel with the reduction of the branch network, there has been a steady increase in the importance of the aTm network. The aTm network increased from less than 40,000 to over 64,000 during the past decade (Chart 42). around a third of aTms are located in branches, a third in retail outlets, with social and leisure facilities accounting for most of the remaining locations. The extension of the aTm network has helped to fill the gaps created by the closure of some branches. People around the UK during 2011 made an average of 5,400 withdrawals every minute of the day throughout the year. Internet banking Online banking is growing in popularity as a delivery channel. The internet has reduced transaction costs and lessened the importance of location. according to Db Research, around 45% of all individuals in the UK used online banking facilities in 2010 (Table 13). Some 44 million customers in the UK have registered for online banking and 38 million for telephone banking. The number of online transactions recorded by major banks has more than doubled to nearly six billion between 2005 and 2010. This meant that an average of 130 online transactions were made by each customer during 2010 (Chart 43). more than 40% of Europeans are expected to use online banking in 2012. The move online is likely to be accompanied by a change in the role of the remaining bank branches where large regional centres that offer financial planning may replace the traditional branch networks. mobile telephone banking is still in its infancy. Currently the most common services used are checking account balances and recent transactions. mobile applications are however at the heart of many new retail banking product innovations and are expect to grow in importance in the coming years. Corporate Electronic Banking is similar to internet banking but is more demanding, requiring greater security, involving a heavier volume of transactions and the ability to support multiple users at a single customer site. Telephone banking remains a key area of service delivery for banks. it includes call centres, call routing, telesales and interactive voice response. Telephone banking can either be used to supplement one of the other channels or as a standalone, primary delivery channel.
Chart 41 Plastic cards Millions in issue 180 Other 160
ATM cards
140 120 Debit cards
100 80 60 40
Credit cards
20 0
2000
2002
2004
2006
2008
2010
Source: APACS
Chart 42 Branches and cash dispensers in the UK Thousands 80 70 60
Cash dispensers
50 40 30 20 Number of Branches 10 0
2001
2003
2005
2007
2009
2011
Source: Payments Council, British Bankers’ Association
Chart 43 On-line transactions in UK banking Billions of transactions each year
of a number of building societies into banks and an increase in the number of new entrants into the market. The largest banks are the major highstreet banks (Table 12), namely HSBC Holdings, Royal Bank of Scotland, Barclays Bank and Lloyds Banking Group. These banks dominate the UK current account market and account for over half of credit cards and personal loans. Branch networks remain an important point of service delivery for banks. Technology is having a major impact on banking in creating new ways in which banks are delivering services to their customers. The competitive pressures on banks’ margins have kept the focus on cost control as a strategic priority. This has resulted in the reduction of the branch network. Many banks are seeking to reduce costs through a combination of outsourcing and offshoring.
18
6
5.80 5.06
5 4.36 4 3
4.52
3.59 2.72
2 1 0
2005
2006
2007
2008
2009
2010
Source: British Bankers’ Association
www.thecityuk.com
BANKING
Operations have in some cases been centralised, allowing lower unit processing costs. Staff numbers have been reduced in some branches and the profile of the work carried out by branch staff has been more oriented towards sales. During the past decade the number of branches in the UK fell by over a quarter, to below 10,000 (Chart 42). The Post Office role as a banking distribution channel has been expanding given that it is the largest cash handler in the UK. A number of banks have established partnerships with the Post Office, which allow their customers to use these offices for their basic banking needs. More than 95% of the 8,438,000 Basic Bank Accounts at the end of 2010 were accessible at Post Office counters (Chart 44).
CONTRIBUTION TO THE UK ECONOMY The UK banking sector is a crucial and integral part of the UK economy. Its core business of taking deposits from one set of customers and lending to a largely different set provides an essential market mechanism for distributing funds to where they are most required and providing a return to those wishing to hold assets in liquid form. A modern economy could not operate without this mechanism, but its ‘value’ is difficult to measure statistically.
may 2012
Table 13 Online banking
Norway Netherlands Iceland Finland Sweden UK US Germany Ireland Spain Poland Italy Greece
Source: DB Research, Eurostat, Forrester Research, Pew 2011
Chart 44 Accounts accessible at Post Office counters Billions of transactions each year Other accounts 9
Output The banking industry contributed around £56bn to UK national output in 2010, or 4.8% of Gross Domestic Product (GDP), over half of the 8.9% accounted for by the financial sector as a whole. Activity in the banking sector has been more volatile than other sectors over the past decade, mainly due to the sensitivity of banking profits to the business cycle.
Online banking adoption, % of all individuals (2010) 83 77 77 76 75 45 45 43 34 27 25 18 6
Accounts accessible at Post Office counters 0.38 0.38
8 7
3.51
6 3.78
5
3.84 8.05
4.02
4
7.45
3
Employment The UK banking industry provided employment for 454,200 (Table 14) people at the end of 2010. This represented around 1.6% of total UK employment. During the past decade, banks have made considerable efforts to reduce costs including staffing which typically accounts for over half of operating expenses. The regional breakdown shows that London accounted for 31% of UK employment in banking or some 141,000. It was followed by North West 10%, Yorkshire 10%, Scotland 9%, South West 8% and the South East 8%. Other cities outside of London with large employment in banking included Edinburgh (15,100), Leeds (14,500) and Birmingham (12,500).
4.17
2 2.37
1 0
2005
2.87
2006
3.48
2007
2008
2009
2010
Source: British Bankers’ Association
Chart 45 UK banks’ net exports £m
A breakdown of employment statistics for member banks of the British Bankers’ Association in 2010 shows that retail banks accounted for 76% of total employment (398,000). Foreign subsidiaries and branches accounted for a further 21,200 (down from 30,700 two years earlier), global banks for 34,600 (37,100), investment banks for 8,600 (8,700) and other domestic banks for 30,100 (24,500).
32,000
Net exports and investment Net exports of banks totalled £24.7bn
12,000
in 2010, down from £27.8bn in 2009 and a high of £33.2bn in 2008 (Chart 45). Latest available data shows that UK financial services net exports increased to £37.9bn in 2011 from £35.7bn in 2010. Banks probably accounted for around three-quarters of this, indicating that their contribution increased in 2011.
www.thecityuk.com
Other non-fin. service earnings
28,000 24,000
Net fee income from financial servs.
20,000
FISIM
16,000
8,000 Spread earnings
4,000 0
1998
2000
2002
2004
2006
2008
2010
Source: ONS, Bank of England
19
may 2012
BANKING
The contribution of banks to financial sector exports overall has been much higher in the past four years than previously. This is due to greater FISIM exports and spread earnings, which combined made up 80% of banks’ net exports in 2010. The contribution to banks’ net exports comes from four sources: spread earnings; FISIM; net fee income from financial services; and other net exports from non-financial services: -
Spread earnings of banks from securities, derivatives and foreign exchange transactions fell to £10.5bn in 2010 from £12.6bn in 2009. Derivatives generated £5.3bn in 2010, just over a half of spread earnings during the year.
-
FISIM exports of banks fell by 11% in 2010 to £9.3bn having dropped by over a third to £10.4bn in 2009 from £15.7bn in 2008, as margin on loan and deposit rates was reduced.
-
Banks’ net fee income on financial transactions fell to £3.7bn in 2010 from £4.0bn in 2009. This includes fee income from investment management & securities transactions, loans & commitment fees, current account services and derivatives transactions. Loans and commitment fees form the largest portion at £1.8bn.
Table 14 Regional contribution of the UK banking sector Thousands London North West Yorkshire Scotland South West South East West Midlands East Midlands East North East Wales North Ireland Total
Banks’ fee income from other non-financial transactions recovered to £1.3bn from £814m in 2009.
International comparisons Coverage of trade in services statistics relating to banks may vary between countries. UK data, for example, includes spread earnings and FISIM but these may only be included in part or not at all in other countries’ figures. The UK’s trade surplus in banking and other financial services was $41bn in 2010. The US surplus on banking and other financial services was $42bn in 2010, slightly up on the two previous years. Switzerland’s $14bn trade surplus in 2010 was also stable. Foreign direct investment into the UK banking sector more than doubled over the past decade to reach £63.3bn in 2010 (Chart 46). During this period outward direct investment grew more than five-fold to £83.4bn.
Tax contribution In 2011 the UK financial services sector as a whole had taxes borne of £27.6bn and also collected total taxes of £35.4bn. Adding together these figures gives a total tax contribution of £63.0bn from the sector, representing 12.1% of all government receipts (Chart 47). Banks are the largest taxpayers in the financial services sector. By number, banks were 37% of the financial companies taking part in the 2011 City of London Corporation Total Tax Contribution study; they paid 72.8% of the total taxes borne; and 66.5% of the total taxes collected. The banks are also the largest employers and generate the largest employment taxes.
GVA 23,125 4,410 3,875 4,439 3,199 5,387 2,908 2,268 2,575 1,473 1,167 680 55,507
Number of local units 3,495 2,308 1,597 1,678 1,774 2,663 1,624 1,287 1,575 712 927 143 19,783
Source: Office for National Statistics
Chart 46 Banks foreign direct investment £bn
90
Inward
80
-
Employment 141,300 45,900 45,300 40,900 35,800 35,200 31,300 21,100 18,600 15,600 13,400 9,800 454,200
Outward
70 60 50 40 30 20 10 0
2000 2002 2004 2006 2008 2010 2001 2003 2005 2007 2009 Source: Bank of England
Chart 47 Tax contribution of UK financial services £bn, year ending March (bars) 80 70 60
% share of UK Government receipts (line) 14 12 10
50 8 40 6 30 20 10
4 2
0 2008 2009 2010 2011 Source: PricewaterhouseCoopers/City of London Corporation 0
20
www.thecityuk.com
OTHER SOURCES OF INFORMATION Bank for International Settlements International Banking and Financial Market Developments (Quarterly) www.bis.org Bank of England Financial Stability Report Monetary and Financial Statistics www.bankofengland.co.uk British Bankers’ Association Annual Abstract www.bba.org.uk Dealogic Investment banking statistics www.dealogic.com European Banking Federation www.fbe.be Financial Services Authority www.fsa.gov.uk
International Monetary Fund www.imf.org Merrill Lynch / Capgemini World Wealth Report www.ml.com Office for National Statistics UK National Accounts - Blue BookUK Balance of Payments - Pink Book www.statistics.gov.uk The Banker Top 1000 World Banks - July edition www.thebanker.com The Boston Consulting Group www.bcg.com UK Payments Administration www.ukpayments.org.uk
SPONSOR Huntswood Matt Hodey Commercial Director email: [email protected] tel: +44(0)7584587025 www.huntswood.com
SIGN UP FOR NEW REPORTS If you would like to receive immediate notification by email of new TheCityUK reports on the day of release please send your email address to [email protected]
DATAFILES Datafiles in Excel format for all charts and tables published in this report can be downloaded from the Reports section of TheCityUK’s website www.TheCityUK.com
THECITYUK RESEARCH: Report author: Marko Maslakovic For further information about our work, or to comment on the programme/reports, please contact: Duncan McKenzie, Head of Research [email protected], +44 (0)20 7776 8976 Marko Maslakovic, Economic Research Senior Manager [email protected], +44 (0)20 7776 8977 TheCityUK, 65a Basinghall Street, EC2V 5DZ www.TheCityUK.com © Copyright May 2012, TheCityUK
MEMBERSHIP To find out more about TheCityUK and the benefits of membership visit www.thecityuk.com or email us at [email protected]
This report is based upon material in TheCityUK Limited’s possession or supplied to us, which we believe to be reliable. Whilst every effort has been made to ensure its accuracy, we cannot offer any guarantee that factual errors may not have occurred. Neither TheCityUK Limited nor any officer or employee thereof accepts any liability or responsibility for any direct or indirect damage, consequential or other loss suffered by reason of inaccuracy or incorrectness. This publication is provided to you for information purposes and is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or as the provision of financial advice. Copyright protection exists in this publication and it may not be reproduced or published in another format by any person, for any purpose. Please cite source when quoting. All rights are reserved.
FINANCIAL MARKETS SERIES
BANKING MAY 2012
Huntswood is one of the UK’s leading independent professional services organisations, serving retail and private client banking organisations and others in heavily regulated markets. Our prime focus is the provision of solutions to complex regulatory challenges that our clients are facing; with no distractions from competing interests, leveraging a considerable track record of expertise and excellence in UK regulated markets. We support all of the UK’s top retail banks, eight of the top ten life and pension companies, six of the top ten General Insurers and 13% of the FTSE 100. To achieve our mission of performance optimisation and risk reduction in highly regulated and complex markets for our clients, our business is split in to four core areas: • Customer Service Delivery – the provision of highly responsive, quality resource solutions to clients facing immediate operational regulatory challenges, either on an in-sourced or out-sourced basis; • Consulting – supporting firms through the ever-changing regulatory landscape with deep technical expertise and market leading consultancy to the UK Banking sector and beyond; • People, Learning & Development – supporting our clients with the challenges of shaping operational excellence by providing expert insight into customer behaviours and delivering award-winning employee development programmes; and • Recruitment – supporting our clients’ permanent, interim and contract recruitment needs in banking sectors and beyond. We can provide the skilled resources for organisations to deal with here and now regulatory challenges; we can advise on what the true impact analysis is from the regulations; and we can also train employees to become the best they can be through deepening their ability to compete in highly complex markets. We can also support firms through their recruitment aims to find the right candidate. Our distinctive combination of technical insight in regulated markets and provision of skilled resources in this sector positions Huntswood uniquely with clients’ evolving regulatory challenges, making us the preferred supplier of choice for a considerable number of leading UK banking organisations and more. www.huntswood.com
TheCityUK champions the international competitiveness of the financial and professional services industry. Created in 2010, we support the whole of the sector, promoting UK financial and professional services at home and overseas and playing an active role in the regulatory and trade policy debate. TheCityUK has a global export focus with a commitment to help UK based firms grow their business in other parts of the world. In 2010, the financial services industry accounted for 9% of UK GDP and 12% of UK tax receipts. The sector currently employs more than 1 million people, more than 66% of whom work outside London, and underpins the businesses that drive jobs and growth. Added together with nearly 1 million employed in professional services, it is easy to see the importance of a sector that employs 7% of the working population. TheCityUK provides constructive advice and is the practitioner voice on trade policy and all aspects of taxation, regulation, and other legislative matters that affect the competitiveness of the sector. We conduct extensive research and run a national and international events programme to inform the debate. Our senior team regularly engages with regulators and policymakers at home and overseas, ensuring the sector’s views are represented at the highest levels. We are tasked with creating a new vision for the financial services sector. We are focused on supporting policymakers and business to deliver the new policy ideas which will help deliver growth.
BANKING MAY 2012
This report gives an overview of the UK banking sector and sets out its importance in an international context. The global banking sector has seen a considerable slowdown in growth since the start of the economic downturn and confidence in its stability has yet to be fully restored. Systemic risks have however been reduced following policy actions and signs of gradual improvement in the global economy. Further risks remain and the banking system is expected to continue to address challenging market conditions in the coming years.
Assets of largest 1,000 banks up 6.4% in 2010/11 to
$101.6 trillion
Chart 1 Worldwide banking industry assets and profits Assets of largest 1,000 banks, $ trillion (bars)
SUMMARY
120
International comparisons Assets of the largest 1,000 banks grew
100
by 6.4% in 2010/2011 to a record $101.6 trillion (Chart 1), with the highest growth registered in China. TheCityUK forecasts a further 6% increase in industry assets during 2011/2012. Profits have seen a sharp decline at the outset of the credit crisis but have since recovered nearly to pre-crisis levels. Banks from emerging market countries have on the whole been less affected by the economic slowdown, and are expected to drive growth in the coming years (Chart 2). In Europe, the increase in sovereign risk in some countries and concerns about government debt levels have spilled over into the banking system, raising the cost of borrowing for many banks and depressing their market capitalisation. Despite the global rise in funding costs, banks around the world have made progress in raising capital ratios. Many banks will need to increase capital levels further as a result of Basel III changes which include higher capital requirements and tighter liquidity rules. A further challenge for the global banking sector in the forthcoming period will be the need to refinance some $3.5 trillion in short-term wholesale funds maturing in 2012 and 2013 (Chart 3). Investment banking fee revenue totalled $70.3bn in 2011, down slightly on the previous year. Business activity has slowed in the second half of 2011 and first quarter of 2012 due to a fall in deal activity and trading volumes. Equity underwriting, fixed income underwriting, M&A advisory and syndicated loans business each accounted for around a quarter of fee revenue in 2011. The US was the source of 54% of business, its highest share in five years. Europe’s share declined during this period to a quarter from close to 40%. The UK was the source of some $3.3bn or a fifth of European fee revenue making it the fourth largest market behind the US, China and Canada. A larger proportion, or about a half of European investment banking activity, is conducted through London.
www.thecityuk.com
Pre-tax profits of largest 1,000 banks, $ billion (line)
800 700 600
80
500
60
400 300
40
200 20 0
100 00/01
02/03
04/05
06/07
08/09
10/11
0
Source: The Banker
Chart 2 Share of global banking assets % share 22.9%
China
10.2% 14.8% 13.3% 12.2%
US India
1.0% 3.8%
Japan
10.4%
2050
3.4% 1.6%
Brazil
2010
2.9%
UK
11.7% 2.7% 4.9%
Germany
2.5%
France
8.7% 2.2% 0.7%
Russia 0
5
10
15
20
25
Source: PricewaterhouseCoopers, IMF, TheCityUK
1
may 2012
banKing
UK banking sector assets totalled a record £8,119bn at the end of 2011, up 3% on the previous year. International banks hold nearly half of UK banking assets while UK owned banks have over half of their assets outside the country. UK banks have made significant progress in improving their capital and funding since the peak of the crisis and have reduced their reliance on the Government for liquidity support. Credit availability however remains constrained, in common with other developed countries. The UK banking sector’s direct exposure to vulnerable sovereign debt in Greece, Portugal, Italy, Spain and Ireland totalled around £15bn at the end of Q3-2011. UK banks have larger exposures to the private sectors in these countries, of over £190bn. This was considerably less than, for example, France and Germany, which had exposures to the vulnerable euro-area of over £400bn and £300bn respectively and more than four times the UK banks’ holdings of sovereign debt. The UK is the leading centre for international banking and home to several of the largest global banks. Its assets are the second largest in the world after the US and, in terms of foreign owned assets, the largest in the world. It has the largest global share of cross-border bank lending (18%). The 251 foreign banks physically located in the UK is more than in any other centre. The UK is also one of the most important centres for private and investment banking and Islamic banking. The rapid rise of internet services have made electronic delivery channels a key priority area for banks. In terms of IT costs, online banking is expected to be the fastest growing area in 2012, with an expected 5.3% increase in spending, followed by mobile telephone banking (5%). Some 44 million customers in the UK have registered for online banking and 38 million for telephone banking, with the number of online banking transactions having more than doubled between 2005 and 2010.
Contribution to the UK economy Net exports of UK banks totalled £25bn in 2010. The UK banking industry contributed £56bn to the economy in 2010, equivalent to 4.8% of GDP, or over half of the 8.9% generated by the financial sector as a whole. Banks located in the UK provided employment for 454,200 people in 2010, over two-thirds of whom were employed outside London. Financial services contributed some £63.0bn in taxes during 2011, or 12.1% of all UK Government receipts. Over two-thirds of this came from the banking sector.
INTERNATIONAL BANKING MARKET The global banking sector has seen a considerable slowdown in growth since the start of the economic downturn. Profits have declined sharply at the outset of the credit crisis but have since recovered nearly to pre-crisis levels. While the financial crisis originated in the US, financial institutions around the world have been affected. Central banks have taken unprecedented interventions to increase liquidity in their banking systems through measures such as monetary policy actions, guaranteeing bank liabilities and recapitalisation. Banks have also made efforts to identify toxic assets, implement deleveraging and adjust business models. International regulators are establishing new rules that will seek to reduce the risk of financial crises and to make the financial system more resilient. Systemic
2
Chart 3 Global bank debt maturity profile $bn, debt maturing 2,000 Others G-10 1,500
1,000
500
0
2011
2012
2013
2014
2015
Source: IMF, Moody’s
Chart 4 Bank rollover requirement 2011-2012, % of total debt Ireland Germany Sweden Switzerland UK US Portugal Spain Netherlands Italy France Belgium Austria Japan Greece
% of debt due in 2012 % of debt due in 2011 0
10
20
30
40
50
figures are for a sample of banks in each country Source: IMF, Bloomberg
1
Chart 5 Largest banking centres assets, $bn, 2010/11 15,000 14,336 12,593
12,000
11,172 11,000 9,371
9,000
6,000
5,305 3,262
3,000
0
US
UK
Japan
China
France Italy Germany
total assets of commercial banks, including subsidiaries Source: IMF, TheCityUK estimates 1
www.thecityuk.com
banKing
risks have been reduced following policy actions and signs of improvement in the global economy. The banking system is expected to continue to address challenging market conditions in the coming years.
Largest banking centres
may 2012
Chart 6 Regional breakdown of largest 1,000 banks % share of total assets 70 60
Worldwide assets of the largest 1,000 banks grew by 6.4% in 2010/2011 to a record $101.6 trillion (Chart 1), with the highest growth registered in China. This follows a 0.9% decline in the previous year, a result of deleveraging in the industry. TheCityUK forecasts a further 6% increase industry assets during 2011/2012. Banks from emerging market countries have on the whole been less affected by the economic slowdown, and are expected to drive the growth of the global banking sector in the coming years (Table 1, Chart 2). The growth rate of assets of the top 1000 banks has averaged around 2.7% a year since the start of the economic downturn. In the years preceding the crisis, bank assets saw double digit growth in some years. Assets of the largest 1,000 banks had more than doubled in the five years leading up to the start of credit crisis. Banks have stepped up efforts to increase capitalisation levels. Despite a rise in funding costs, banks around the world have made progress in raising capital ratios. The global average Tier 1 capital to assets ratio totalled 5.35% in 2010/11, up from 5.14% in the previous year and the low of 4.32% three years earlier. This is set to increase further as a result of global changes in regulation which have raised capital requirements. Although European banks as a whole have raised capital levels, their balance sheets remain leveraged and reliant on wholesale funding to a greater extent than most other regions. In the UK, the extent to which banks have used wholesale markets to fund lending has been reduced significantly in recent years. Banks around the world have over $3.5 trillion in wholesale funds which will need to be refinanced in 2012 and 2013. Bank debt rollover requirements are most immediate in Ireland, Germany and Sweden (Chart 4). This is made more difficult in some European countries by an increase in funding costs and sharp rise in bank debt yields resulting from an increase in sovereign risk. As a result some banks have turned to repo markets and the ECB for refinancing. Regional distribution of assets and number of banks Latin American banks have seen an annual growth of 28% since the start of the economic downturn. Asia Pacific and North American banks grew by 16.3% and 6.9% respectively during this period. Europe on the other hand saw a 3.3% average annual decline. This was partly due to pressures on European banks to deleverage as funding strains intensified and regulators imposed new capitalisation targets. Western European banks held the largest share of global bank assets, 48%, down from 61% three years earlier (Charts 5 and 6). Asian banks’ share increased from 21% to 31% during this period, while the share of US banks increased from 14% to 16%. The UK banking sector assets totalling $12,593bn in 2010/11 were the second largest in the world after the US and its foreign owned assets are were largest in the world (Chart 5). US assets totalled $14,336bn while Japan held the third highest total $11,172bn. Countries with the highest asset growth in 2010/11 included China 44%, Vietnam 34%, Belarus 33%, Peru 32% and Australia 32% (Table 2). Chinese banks accounted for 15 of
www.thecityuk.com
Europe
50 40
Asia-Pacific
30 20 10
North America Rest of world
0 2000/01 2002/03 2004/05 2006/07 2008/09 2010/11 2001/02 2003/04 2005/06 2007/08 2009/10 Source: www.thebankerdatabase.com
Table 1 Emerging market countries bank assets growth
China Brazil India Russia Turkey South Africa Malaysia Saudi Arabia UAE Iran Mexico Poland Source: The Banker
2010/11 % change 214 8,564 310 1,613 133 983 312 652 137 524 61 492 101 405 106 347 308 320 177 288 70 178 132 263
2005/06 2,728 393 423 158 221 305 201 169 78 104 164 113
Table 2 Top 10 countries by asset growth 2009/10-2010/11 1 China 2 Vietnam 3 Belarus 4 Peru 5 Australia 6 Georgia 7 Indonesia 8 South Africa 9 Kenya 10 Azerbaijan Source: www.thebankerdatabase.com
Asset growth (%) 43.9 33.9 32.6 32.0 31.9 30.7 29.6 29.0 27.1 25.3
Table 3 EU-27, US and Japanese banking sectors 2010/11 Number of banks Assets of banks (€ trillion) Assets per bank (€ billion) Top 6 banks’ assets as % of total Top 10 banks’ assets as % of total Bank assets, % of GDP Total bank deposits (€ trillion) Total bank loans (€ trillion) Employees per bank Citizens per bank (thousand)
EU-27 6,825 42.9 6.3 24.3% 35.0% 349% 17.1 17.7 376 73
US 6,530 8.6 1.3 49.6% 56.1% 78% 6.5 4.9 272 48
Japan 715 7.2 35.1 3.8% n/a 174% 5.6 3.9 n/a n/a
Source: European Banking Federation
3
may 2012
banKing
the top 25 highest movers during the year. Nearly all of the top 10 countries with the largest contraction in assets during 2010/11 were from the EU. They included Ireland with a fall of 19%, and Germany and Hungary with a drop of around 10% each. Other EU countries with large contractions in assets included Denmark, Slovenia, Greece, France, Cyprus and Portugal. A regional breakdown shows that there were 345 banks from Asia-Pacific in the 2010/11 Banker Magazine Top 1000 rankings, up from 321 in the previous year. The number of banks from Western Europe totalled 243 (down from 278), North America 190 (184), Middle East 83 (90), Latin America 53 (44), Eastern Europe (51 (48) and Africa 30 (30). The US has by far the largest number of banks (6,530) and branches in the world (83,000). This is an indicator of its geographical dispersity and regulatory structure resulting in a large number of small to medium sized institutions in its banking system. In Western Europe, Germany, France and Italy have over 30,000 branches each. This was nearly three times the number of branches in the UK. Germany has the highest number of registered banks and the most employees. The UK has more ATMs per head, with 1,035 ATMs per 1 million people, ahead of Greece 860, Italy 759 and Germany 705.
Chart 7 Banking sector assets as per cent of GDP % share, end-2010
split between UK domestic and foreign assets
759%
Ireland 548%
Switzerland
521%
UK France
405%
Netherlands
382% 349%
EU-27
332%
Germany
306%
Spain Japan
Total assets UK domestic assets UK foreign assets
174%
US
78%
0
100 200 300 400 500 600 700 800
Source: European Banking Federation
Assets as a per cent of GDP The UK’s banking sector assets as a per cent of GDP totalled around 520% in 2010. This was higher than in the US (78%) and Japan (174%). In the US, a significant quantity of financing takes place through securities markets rather than through bank lending which means that a large proportion of debt is held by non-bank organisations. The EU average of bank assets to GDP was around 350%
European sovereign debt crisis and the banking system in Europe, sovereign risk and concerns about government debt levels in some countries have spilled over into the banking system, raising the cost of borrowing for affected banks and depressing their market capitalisation. The heightened credit risk has spread to nearly a half of the €6.5 trillion stock of government debt issued in the region. This has resulted in rising spreads on government borrowing in a number of European countries. as the European banking system is highly interconnected, banks are exposed both to the direct risk of holding government debt as well as the indirect risk in lending to banks that hold risky sovereign debt. in addition, sovereign downgrades and perceived erosion of government guarantees to the banking sector, has resulted in rating agencies downgrading ratings for a number of banks. The European debt crisis has generated some €300bn in credit risk for European banks according to imF analysis. This figure is not a measure of banks’ capital needs, but rather it approximates the sovereign credit risk experienced by European banks. The imF analysis suggests that EU banks’ exposure to greek sovereign debt amounts to around €60bn. Exposure to sovreign debt in ireland and Portugal amounts to some €20bn. as governments in belgium, italy and Spain have also come under pressure, the total spillover including these countries probably amounts to around €200bn. including effects from the fall in bank asset prices in countries directly effected by increases in sovereign risk, adds an additional €100bn in credit risk of interbank exposures. The imF states that, although these estimates are based on market
4
assesments of credit risk, which may reflect a degree of overshooting, the underlying problems that they highlight are real. High-spread euro area systems have seen the most severe spillovers into their banking systems. a number of other banking systems such as those in Cyprus, Luxembourg, France and germany have experienced spillovers from the high-spread euro area to their foreign operations or cross-border exposures (Chart 8). although banks in the UK have a limited exposure to sovereign debt in high spread countries, they have large exposure to private sectors in these countries as well as indirect exposure to banking systems in France, germany and netherlands which have substantial exposures to vulnerable sovereign debt (Table 9). On 21 December 2011, the European Central bank (ECb) instituted the so called long-term refinancing operation (LTRO) - a programme of making low-interest loans with a term of three years in an effort to ease funding pressures on European banks facing large-scale redemptions. in total, 523 banks from 17 eurozone countries bid for €489bn in funding. by far the biggest amount of €325bn was loaned to banks in greece, ireland, italy and Spain. in this way the ECb tried to make sure that banks have enough cash to pay off €200bn of their own maturing debts in the first three months of 2012, and at the same time keep operating and loaning to businesses. in February 2012, the ECb held a second three year auction, providing eurozone banks with a further €530bn in low-interest loans. This second long term refinancing operation auction saw 800 banks take part.
www.thecityuk.com
banKing
(Table 3). The UK’s high ratio is a reflection of the international character of its banking sector, as nearly a half of its banking sector assets are foreign owned. This is a much higher proportion than in most other large European countries apart from Switzerland. Excluding the overseas element, the UK’s banking sector assets as a percentage of GDP are around the EU average. Other large European countries with a high ratio of banking sector assets to GDP include Ireland (759%) and Switzerland (548%) (Chart 7).
may 2012
Chart 8 Spillover from high-spread euro area sovereigns In % of assets Greece1 Cyprus Portugal1 Italy1 Spain1 Belgium1
Comparisons of bank profitability Pre-tax profits of the world’s largest 1,000 banks increased by over three-quarters in the 2010/11 financial year to $709bn from $401bn in the previous year. This was around 10% below the peak in profits in the two years preceding the credit crisis but represents the second successive year of strong growth. Average global return on capital (pre-tax profits to Tier 1 capital) increased to 13.1% in 2010/11, from 8.6% in the previous year (Chart 10).
Ireland1
Banks
Luxembourg
Sovereigns
France Germany Slovenia Netherlands UK 0
2
4
6
8
10
high spread country Source: IMF staff estimates 1
On a regional basis, profits of banks in the US increased by 194% in 2010/11, while those in the eurozone rose 84%. The Asia-Pacific region however accounted for the largest share of profits, 41% of the global total, up from 37% in the previous year. North America also saw an increase in its share to 20% from 14%. Western Europe saw its share decline to 25% from 31%. Most other regions also saw a decline in their share (Chart 9). According to The Banker, four of the top seven banks with the largest profits in 2010/11 were Chinese. US banks, JP Morgan Chase & Co, and Wells Fargo & Co were in 3rd and 6th place respectively. The UK’s HSBC Holdings was 4th with pre tax profits of $19bn. Barclays was the only other UK bank amongst the top 25. Emerging market countries led the rankings for average profit on capital with Pakistan, Brazil, Indonesia, Egypt and Argentina leading the way.
Shadow banking system The shadow banking system represents the system of credit intermediation that involves entities and activites outside the regular banking system. it includes for example hedge funds, money market funds and structured investment vehicles. Like traditional banks, shadow banks provide credit and liquidity but, unlike their traditional counterparts, they do not have access to central bank funding or deposit insurance. The shadow bank function is important because by providing funding to traditional banks it facilitates credit availability to businesses. However, as shadow banks do not take traditional deposits, they are subject to less regulation than traditional banks. assets in the shadow banking system grew rapidly before the credit crisis, reaching $60 trillion in 2007, double their total four years earlier and around half the size of banking sector assets. Since then, assets have remained at around the $60 trillion level. The US had the largest share of assets in 2010 with 46% of the total. it was followed by the UK (13%), Japan (8%), netherlands (8%), France (6%) and germany (5%).
Chart 9 Regional breakdown of pre-tax profits % 40 35
2010/11
30
2009/10
25 20 15 10 5 0
Asia pacific
North Middle Africa America East Western Latin Eastern Europe America Europe Source: www.thebankerdatabase.com
Chart 10 Return on capital and assets in all banks % profits / Tier one capital
% profits / assets
25
20
1.2
1.0
Return on assets
0.8 15 0.6
The regulation of the shadow banking system is under review internationally under the auspices of the Financial Stability board, with the goal of putting in place an appropriate system-wide oversight framework to identify and assess risks on a continuous basis. in the US, the Dodd-Frank act made provisions by stipulating that the Federal Reserve would have the power to regulate all institutions of systemic importance. Other provisions include for example new registration requirements for hedge funds. in the EU, the European Commission has published a Communication on Shadow banking. Recommendations for g20 leaders on regulating shadow banks are due to be finalised by the end of 2012.
www.thecityuk.com
Return on capital
10
0.4
5
0
0.2 0.0 2000
2002
2004
2006
2008
2010
Source: The Banker
5
may 2012
banKing
Loan-to-deposit ratios Table 4 Regional cost-to-income ratios are an important indicator of liquidity. % change Average costto-income ratio (%) operating costs Banks with lower loan-to19.1 49.7 Africa deposit ratios are in a 19.3 55.2 Asia-Pacific 4.6 36.6 Caribbean much stronger position 10.5 44.6 Eastern Europe as they rely more on 1.0 55.1 Western Europe 12.7 61.7 America deposits than wholesale Latin 9.4 41.4 Middle East 8.8 63.3 markets to fund lending North America www.thebankerdatabase.com Source: activities. Banks in Western Europe have the highest loan-to-deposit ratios in recent years, averaging 125.4% in 2010/11. This means that these banks were more dependant on wholesale capital markets to fund lending activities than banks from other regions (Chart 11). Loan to deposit ratios averaged 116.8% in Central Asia, and 110.2% in Eastern Europe. Of countries with large banking sector assets, China had the lowest ratio, with loans on average at two-thirds the value. Ireland and Netherlands on the other hand had the highest ratios with over 200% each. The UK ratio is lower than in most other large countries apart from Germany, having fallen from 123.7% to 102.0% in the five years to 2011. The cost/income ratio is another important indicator of banking efficiency, measuring banks’ operating costs as a proportion of total income. The lower the ratio the more efficient the bank is deemed to be. In the run up to the crisis a ratio of 40% was a common target. The average global costto-income ratio had rapidly deteriorated at the outset of the crisis. More recently, however, there has been a recovery and the average global ratio stood at 67% in 2010/11. Regionally, the cost-to-income ratio was lowest in the Middle East (41%). Asia and Eastern Europe had cost-to-income ratios of around 50%, followed by Latin America and Western Europe (Table 4). The North American banking sector was less efficient on this measure with a ratio of 63%. The Japanese sector had the highest ratio of the large countries with 128%. Luxembourg, Qatar and the United Arab Emirates has the best costto-income ratio, all below 30%. Of the large countries, China had the lowest ratio at 39%.
Chart 11 Bank loan-to-deposit ratios % 150 Euro area
120
UK
90 US
60
2006
2007
2008
2009
2010
2011
Source: IMF
Chart 12 International bank lending flow $bn, exchange rate adjusted changes in value outstanding 3,000 2,500 2,000 1,500 1,000 500 0 -500 -1,000 -1,500 -2,000 -2,500
2001 2003 2005 2007 2009 2011 2002 2004 2006 2008 2010 Source: Bank for International Settlements
Chart 13 Origin of cross-border transactions
Cross-border banking % share of total, September 2011
International lending and borrowing Bank for International Settlements (BIS) estimates that the total outstanding value of cross-border lending was $31,682bn as at end-September 2011. The $91bn increase in gross international claims of BIS reporting banks in Q3-2011 (Chart 12) was exclusively caused by an increase in interbank claims. By contrast, claims on non-banks recorded their largest decline since the fourth quarter of 2009. The increase followed quarterly rises of $1,253bn and $151bn in Q1 and Q2. This was the first occasion there have been three consecutive quarters in which lending has increased since the start of the economic downturn. There were however signs of a slowdown in Q3 as cross-border lending to non-banks in all major developed areas apart from Japan contracted or remained more or less unchanged. Also, cross-border claims on emerging market countries declined for the first time in 10 quarters.
6
Borrowing 21
Lending 19
UK
13 4 6 8 5
US
11
Japan
10
Germany
9
France
8
Netherlands
4
2
Hong Kong
3
2
Luxembourg
3
39
Others 35 30 25 20 15 10 5 0
5
26
0 5 101520253035
Source: Bank for International Settlements
www.thecityuk.com
banKing
may 2012
basel iii
Chart 14 Basel III - implementation
banks are facing an important regulatory challenge in the coming years. basel iii is a global regulatory standard on bank capital adequacy, stress testing and market liquidity risk agreed upon by the members of the basel Committee on banking Supervision in 2010/11. it was developed in response to the deficiencies in financial regulation revealed by the recent financial crisis with the goal of promoting a level global playing field with regard to capital, leverage, and liquidity regulations.
% (build up of common equity and conservation buffer) 15
Tier 1 Equity Capital Conserv. Buffer Min Common Equity
12
basel iii will require banks to hold 4.5% of common equity (up from 2% in basel ii) and 6% of Tier i capital (up from 4% in basel ii) of risk-weighted assets. basel iii also introduces additional capital buffers: a mandatory capital conservation buffer of 2.5% and a discretionary countercyclical buffer, which allows national regulators to require up to another 2.5% of capital during periods of high credit growth. in addition, basel iii introduces a minimum 3% leverage ratio and two required liquidity ratios. The Liquidity Coverage Ratio requires a bank to hold sufficient high-quality liquid assets to cover its total net cash outflows over 30 days; the net Stable Funding Ratio requires the available amount of stable funding to exceed the required amount of stable funding over a one-year period of extended stress.
6.00 6.00
9
6.00 5.00 5.50
6
6.00
4.50
6.00 1.88 2.50
0.63 1.25
Min existing Tier 1 plus Common Equity
4.00
3 2.00
0
3.50 4.00 4.50 4.50 4.50 4.50 4.50 4.50
2012
2014
2016
2018
Min existing Common Equity
2020
Source: Basel Committee on Banking Supervision
an OECD study released in February 2011 estimates that the medium-term impact of basel iii implementation on gDP growth is in the range of −0.05 to −0.15 percentage point per year. Economic output is mainly affected by an increase in bank lending spreads as banks pass a rise in bank funding costs, due to higher capital requirements, to their customers. With the core basel iii framework being adopted by authorities, the focus of attention is shifting towards implementation. The transition is due to start in 2013 with a gradual move to basel iii bank regulations over the coming years (Chart 14).
Chart 15 Largest banks by market capitalisation $bn market capitalisation, $bn, end-2011 Ind. & Com.Bank of China China Construction Bank Wells Fargo
The UK, with 19% of international bank lending in September 2011 (Chart 13), was the largest single market for cross-border banking business; its share slightly up from the previous year. The US, with 11%, had the second largest share. Elsewhere, market share remained relatively stable with offshore banking centres retaining around a fifth of banking flows. The most important borrowers in the global lending market are industrialised countries. The UK had the largest share with 21% of the total, followed by the US with 13%, and France with 8%.
HSBC Agricult. Bank of China JP Morgan Chase Bank of China Itau Unibanco Citigroup Inc. Commonw. Bank of Austral. 0
The international character of the UK market for cross border lending is reflected in the range of countries represented there and the spread of currencies. The most active banks in cross border banking operating in the UK are UK-owned, followed by German, Swiss and US banks. The dominant currencies are the US dollar and euro, each with around 40% of cross border lending, followed by sterling with 7%. Number of foreign banks Statistics on the number of foreign banks reveal that London remains the most popular centre with 251 foreign banks located there in March 2011. The next most popular location was New York, with around 200 foreign branches and representative offices. The smaller number of foreign banks in New York is largely an indicator of the nature of the US banking industry which is more oriented towards serving the domestic market.
Largest global banks The largest 25 banks list is dominated by Western banks and a few Japanese and Chinese players. In terms of Tier 1 capital, Bank of America
www.thecityuk.com
50
100
150
200
250
Source: www.banksdaily.com
Table 5 Largest banks in the world Ranking
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Previous (1) Bank of America Corp US (2) JPMorgan Chase & Co US (5) HSBC Holdings UK (3) Citigroup US (11) Mitsubishi UFJ Financial Group1 Japan (7) Indust. Comm. Bank of China China (6) Wells Fargo & Co US (15) China Construction Bank Cor. China (14) Bank of China China (4) Royal Bank of Scotland UK (8) BNP Paribas France (10) Barclays UK (9) Banco Santander Spain (28) Agricultural Bank of China China (13) Credit Agricole France
$bn, 2010/11 Assets Tier 1 capital 2,265 163.6 2,118 142.4 2,455 133.2 1,914 126.2 2,481 119.7 2,032 113.4 1,258 109.4 1,632 95.8 1,580 94.6 2,275 91.6 2,671 83.8 2,331 81.0 1,628 79.3 1,561 77.4 2,314 76.1
3/2011 Source: The Banker
1
7
may 2012
banKing
and JP Morgan Chase & Co claimed the top two spots for the second year running (Table 5). The UK’s HSBC Holdings climbed from 5th to 3rd place during the year. Other UK banks to appear amongst the top 25 include the Royal Bank of Scotland in 10th place (4th place in the previous year), Barclays 12th (10th) and Lloyd’s Banking Group 18th (12th). Countries with most banks among the Top 1000 were US 192 (up from 183), China 111 (84), Japan 105 (102), Germany 40 (72), UK 29 (22). Chinese banks are steadily increasing in size with three banks in the top 10 in the latest rankings.
Investment banks’ revenue slightly down in 2011 to
$70.3bn
Chart 16 Global investment banking revenue $bn, revenue 100 90
In terms of market capitalisation Industrial and Commercial Bank of China and China Construction Bank held the top two spots with market capitalisation of over $190bn each at the end of 2011 (Chart 15). They were followed by Wells Fargo and HSBC. A further two banks from China appear in the top 10 rankings. A decade earlier, the rankings were dominated by banks from the US and UK.
80 70 60 50 40 30
Banks’ business has become more global, facilitated by the reduction in barriers to international trade and technological developments. The share of assets of the largest ten global banks grew to 23% in 2010/11 from 15% a decade earlier. The US market is more concentrated than most other regions. The top six banks in the US accounted for around a half of US banking sector assets, more than twice the corresponding share of EU banks. The top 10 banks in the US accounted for 56% of overall assets, compared to 35% in the EU (Table 3). Further consolidation is likely, especially in Continental Europe with the banking sector in Germany, France and Italy being more fragmented than in the UK. Competition has been intensified by new players such as internet banks and institutions whose parent companies are not part of the traditional banking sector such as supermarket banks and insurance companies.
20 10 0 2001 2003 2005 2007 2009 2011q1 q2 q3 q4 q1 2011 2012 Source: Dealogic
Chart 17 Investment banking revenue, by world region $bn, announced deals
100 90
13%
14%
23%
35%
26%
20%
80 70
INVESTMENT AND PRIVATE BANKING
60
Size of the investment banking industry
40
38%
39%
26%
50
30
Global investment banking revenue totalled $70.3bn in 2011, down slightly on the previous year (Chart 16). Fee revenue of $42.1bn generated during the first half of 2011 represented the strongest start to a year in four years. Business activity however slowed since then.
49%
20
47%
44%
2008
2009
51%
54%
2010
2011
10 0
2007
Americas
The US accounted for 45% of total investment banking revenue in 2011, its highest share in five years. EMEA (Europe, Middle East, Africa) showed a decline during this period to 26% from 38%. Asia’s share also declined in 2011 to around a fifth of the total. This was however nearly double its share four years earlier (Chart 17).
Source: Dealogic
Companies in the UK, were the source of $3.3bn of global revenue (Table 6), down 15% on the 2010. This represented around 4.6% of global fee revenue making it the fourth largest market behind the US, China and Canada. Although the UK was the source of around a fifth of European investment banking fee revenue, around a half of European investment banking activity was conducted through London. The majority of investment banks are either headquartered or have a major office there. The largest international banks in the UK each employ several thousand people.
1 2 3 4 5 6 7 8 9 10
8
21%
EMEA
Asia Pacific
Table 6 Investment banking revenue by nationality 2011 United States China Canada UK Japan Germany France Australia Italy Spain Others Total Source: Dealogic
Fee revenue ($m) 31,836 4,568 4,288 3,260 2,767 2,511 2,502 2,331 1,309 1,294 13,676 70,342
% share 45 7 6 5 4 4 4 3 2 2 18 100
annual % change 5 -20 10 -15 -28 2 11 15 49 -6 -2 0
www.thecityuk.com
banKing
As market conditions improve, investment banks will not be able to rely to the same extent on fees generated by financial restructuring. Regulatory changes may bring stricter conditions with respect to capital costs. On the other hand, a low interest rate environment, along with an increase in corporate confidence and less volatile markets, should help to facilitate a pickup in M&A activity. China and other Asian countries as well as sovereign wealth funds from the Middle East are likely to become a more important source of investment banks’ business in the coming years.
may 2012
Chart 18 Investment banking revenue product breakdown global, % share 100 30%
80
23%
ECM
24%
Syndicated loans
60
16%
40
28%
26%
DCM
25%
27%
M&A
2010
2011
Investment banks’ business Most investment banks' work is undertaken on behalf of large companies, banks and government organisations with some also providing a service to wealthy individuals. A number of investment banks, particularly from the US, have expanded into the retail sector while at the same time some commercial banks through mergers and acquisitions have increased their presence in investment banking. Investment banks' business can broadly be categorised into: corporate finance and advisory work, treasury dealing, investment management and securities trading. Only a few investment banks provide services in all these areas. Most others tend to specialise to some degree and concentrate on a few product lines. A number of banks have diversified their range of services by developing businesses such as proprietary trading, servicing hedge funds or making private equity investments.
20
0
Source: Dealogic
Chart 19 Global M&A activity $bn, announced deals
5,000
UK Other Europe
4,000
Product breakdown Equity underwriting, fixed income underwriting, mergers and acquisitions (M&A) and syndicated loans business each accounted for around a quarter of total fee revenue in 2011 (Chart 18). -
-
-
M&A advisory had been the main source of fee income globally in the decade prior to the current economic slowdown. Its share has however, fallen compared to years immediately preceding the credit crisis, while other areas of investment banking have increased. Fees from M&A advisory work totalled $19.2bn, or 27% of total fee revenue in 2011, up on 25% in the previous year. Announced corporate M&As increased by 2% in 2011 to $2.80 trillion. This was the highest level of activity in three years but well down on the peak in 2007 (Chart 19). The US accounted for 36% of the total, Europe 29%, Asia Pacific (excluding Japan) 19%. Real estate was the leading sector for global M&As in 2011, accounting for 10% of activity. Oil and gas, finance, utility and energy, healthcare and technology were the next most important sectors. Despite a decline of nearly 10% during the year in activity, the UK was the most targeted nation in Europe in 2011 with $137bn. M&As were also the leading source of fee revenue of UK investment banking business (Chart 20). Equity underwriting (ECM) generated around $16bn or 23% of investment banks’ fee revenue in 2011. This was down from 30% in 2010, as the IPO market slowed in the second half of the year. Fixed income underwriting (DCM) accounted for 26% of total investment banking fee revenue in 2011 or around $18bn. This was down on its 28% share in the previous year.
www.thecityuk.com
Other
3,000
2,000
1,000
0
2003 2005 2007 2009 2011 2001 2002 2004 2006 2008 2010
Source: Dealogic
Chart 20 UK investment banking revenue by product % share 100 23%
ECM
24%
Syndicated loans
26%
DCM
27%
M&A
30% 80 16% 60 28% 40
20
0
25%
2010
2011
Source: Dealogic
9
may 2012
banKing
Table 7
Chart 21
Largest investment banks 2011 1 2 3 4 5 6 7 8 9 10
JP Morgan Bank of America Merrill Lynch Goldman Sachs Morgan Stanley Credit Suisse Deutsche Bank Citi Barclays Capital UBS Wells Fargo Securities Source: Dealogic
Investment banking revenue - by industry Revenue Market $m share
Debt %
Equity %
Loans %
M&A %
8.1 7.4 5.7 5.6 5.1 5.1 4.6 3.9 3.3 2.4
24 24 22 22 26 32 32 34 26 25
19 18 23 29 24 21 21 19 25 16
30 37 11 13 18 18 26 23 11 54
27 21 43 36 32 29 21 24 38 6
5,663 5,198 4,005 3,955 3,590 3,564 3,213 2,771 2,342 1,662
Annual change % 6 8 -5 -2 -2 -3 4 3 -15 32
source of revenue, global % share, 2011
Financial institutions Other 18% Healthcare
7% 7%
Technology
20%
Syndicated loans generated 24% of global investment banking fee revenue in 2011, up from 16% in 2010. A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment banks known as arrangers.
Sector breakdown Despite a one-fifth drop in fee revenue to $15.4bn, companies in the financial sector have consistently been the source of the highest share of investment banks’ business over the past decade both globally and in the UK (Charts 21 and 22). Its 22% global share was ahead of energy and natural resources (20%), industrials (15%), which both saw a 6% increase in revenue to $14.1bn and $10.8bn respectively. Other fee generating industries included consumer and retail (10% of total) and technology and healthcare (7% each).
Largest investment banks The credit crisis has had a profound effect on the investment banking sector. Several investment banks failed, were bailed-out by governments, or merged since the start of the economic downturn. While the specific circumstances varied, in general the decline in the value of mortgagebacked securities held by these companies resulted in either their insolvency or inability to secure new funding in the credit markets. In 2011, JP Morgan and Bank of America Merrill Lynch led the rankings of the largest investment banks, each generating more than $5bn in fee revenue (Table 7). The largest banks’ capital resources enable them to offer a broad product range supported by strong international distribution networks. The smaller players typically focus on particular products or regions. In 2011 the largest ten global investment banks generated 51% of global investment banking revenue (Chart 23). This was down from 58% four years earlier. Consolidation in Europe has created larger investment banks, although these are still not as big as their US counterparts.
Private banking
15% Industrials Total: $70.3bn
Source: Dealogic
Chart 22 UK investment banking revenue - by industry source of revenue, % share, 2011
10
Financial institutions
Other 18%
Business services
22%
7% Transportation
7% 10%
Industrials
20% Energy & natural resouces
15% Consumer & retail
Total UK fee revenue: $3.3bn Source: Dealogic
Chart 23 Global investment banking, concentration % share 100 90 80
42
Others
49
Next 5
19
Top 5
32
70 60 50
23
40
Assets under management of private banks increased by 11% in 2010 to $17.1 trillion. This was the second successive year of growth, but still slightly below the peak of $17.4 trillion in 2007 (Chart 24). Average income was up 9% during the year while profits increased by 15.5%. Private banks with the highest gross margins since the start of the credit crisis were those with strong deposit and lending capabilities. Regulatory changes in the wider banking industry may bring tighter scrutiny on private banking
Energy & natural resources
10% Consumer & retail
-
22%
30 20
35
10 0
2007
2008
2009
2010
2011
Source: Dealogic
www.thecityuk.com
banKing
business, particularly offshore business which accounts for around a third of private banking business.
may 2012
Table 8
Chart 24
Largest private banks
Global private banking industry
Assets under management, end-2010 1 2 3 4 5 6 7 8 9 10
Bank of America Morgan Stanley UBS Wells Fargo Credit Suisse Royal Bank of Canada HSBC Deutsche Bank BNP Paribas JP Morgan Other Total
$bn 1,945 1,628 1,600 1,398 865 435 390 369 340 284 7,846 17,100
% share 11.4 9.5 9.4 8.2 5.1 2.5 2.3 2.2 2.0 1.7 45.9 100.0
The large number of high net worth individuals (NWI) around the world provide opportunities for a wide range of firms and institutions that deliver Source: Scorpio Partnership services to this community. The latest Merrill Lynch/Cap Gemini Ernst & Young’s annual World Wealth Report estimated that the value of funds managed on behalf of 10.9 million high NWIs with over $1m of investable worldwide assets increased by 9% in 2010 to a record $42.7 trillion (Chart 25). The US, Japan and Germany accounted for 54% of the world’s high NWI population. BCG, in its annual report Global Wealth 2011, estimated that the total value of assets managed on behalf of all investors increased by 9% in 2010 to $121.8 trillion, following a 21% increase in the previous year. Investment of private wealth is located either in onshore or offshore centres. The main centres for onshore investment are the major financial centres of the world, notably London, New York, Singapore, and Hong Kong. Key offshore centres also include Switzerland, the largest, as well as Luxembourg, the Channel Islands, Bermuda and the Cayman Islands.
Assets under management, $ trillion
18 16 14 12 10 8 6 4 2 0
2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Scorpio Partnership Ltd
Chart 25 Global private wealth value of assets, $ trillion 120
All investors (BCG)
100 80 60 High net worth individuals (MLCG)
Largest private banks The private banking market is relatively fragmented with many medium sized and small players. It is however heavily concentrated at the top end with the largest four private banks accounting for nearly 40% of global assets under management at the end of 2010 (Table 8). Banks from Switzerland and the US feature high in the rankings. Bank of America had the most assets under management, followed by Morgan Stanley, UBS and Wells Fargo. HSBC and Barclays are the only UK banks to feature in the ‘Top 20’ list, although all of the largest private banks have a substantial presence in London.
40 20 0
2000
2002
2004
2006
2008
2010
Source: The Boston Consulting Group (BCG) Merrill Lynch Capgemini (MLCG)
Chart 26 Islamic finance
Islamic banking The global market for Islamic financial services, as measured by sharia compliant assets, grew by 21% in 2010 to $1,131bn. Assets are likely to have grown a further 14% in 2011 to reach $1,289bn, making a rise of approximately 150% from $509bn in five years since 2006. The largest centres remain concentrated in Malaysia and the Middle East, including Iran, Saudi Arabia, UAE, Kuwait, Bahrain and Qatar. Islamic commercial banks accounted for the bulk of the assets with investment banks and funds making up most of the remainder (Chart 26).
Banking, takaful & fund assets, $bn, end-2010
UK Turkey 19 28 Qatar
Others 83
50
Bahrain
Kuwait
Iran
56
388
69
93
UAE
Islamic finance has shown resilience during the past two years at a time when global recovery has slowed and conventional banking in Western countries has remained under pressure. It is not unaffected by broader global macroeconomic problems with some Islamic banks exposed to the volatile real estate markets. In the Middle East, especially the Gulf, Islamic
www.thecityuk.com
120
Malaysia
148
S.Arabia
Banking, takaful & fund assets total: $1,086bn Source: The Banker
11
may 2012
banKing
finance has benefitted from economic and financial stability, despite political unrest in a few countries. Banks account for the bulk of the assets globally with funds and takaful making up the balance. Banks and funds are major investors in sukuk, which strengthened in 2011: issuance was up 60% to a record $84bn, of which two thirds was from Malaysia.
Chart 27 Bank leverage %, adjusted tangible assets to Tier 1 common capital 35 30
Euro area
25
Considerable potential exists for expansion of Islamic finance with The Banker estimating that only 12% of Muslims worldwide use Islamic financial products. The extent of the industry’s penetration varies substantially. In Bangladesh, for example, Islamic banking accounts for 65% of total banking assets while in Indonesia its share is only 4%.
UK 20 US 15 10 5
The UK is the leading Western country and Europe’s premier centre with $19bn of reported assets, largely based on HSBC Amanah. London’s profile as the leading Western centre for Islamic finance has grown in recent years, although institutions in the UK have been providing Islamic financial services for 30 years. An important feature of the development of London and the UK as the key Western centre for Islamic finance has been supportive government policies intended to broaden the market for Islamic products. There are 22 banks in the UK that have set up windows to provide Islamic financial services. Five of these are fully sharia compliant, more than in any other Western country.
0
2006
2007
2008
2009
2010
2011
Source: IMF
Table 9 Major UK banks exposure to euro-area countries End-Q3 2011 (£bn)
THE UK BANKING INDUSTRY
Sovereigns
Greece Portugal Italy Spain Ireland Total vulnerable Europe
The UK is the leading centre for international banking and home to several of the largest global banks. International banks hold nearly half of UK banking assets while UK owned banks have over half of their assets outside the country. Some UK banks faced major challenges during the financial crisis due to a range of factors including over exposure to sub-prime securities, debts from mortgage lending arising from the decline in the property market, and over dependence on wholesale money markets to fund lending. Banks have however made significant progress in repairing their balance sheets, improving their capital and funding and have reduced their reliance on the official sector for liquidity support.
1.3 1.1 5.5 3.9 3.0 14.8
7.4 15.0 39.3 59.7 87.9 209.2
60.8 44.8 46.2 3.6 318.4
176.9 147.7 104.6 11.4 649.8
90.0 36.7 20.8 3.8 182.7
France 26.2 Germany 66.1 Netherlands 37.6 Belgium 4.0 Total 148.7 Source: BIS, TheCityUK estimates
Total
Banks Non-bank private sector 5.4 0.6 11.8 2.1 28.8 5.0 43.6 12.2 73.4 11.5 163.0 31.4
Chart 28 UK resident banks lending
UK banks exposure to sovereign debt in Greece, Portugal, Italy, Spain and Ireland totalled close to £15bn at the end of Q3-2011. However, UK banks have large exposures to the private sectors in these countries of over £190bn. This was considerably less than for example France and Germany, which had exposures to the vulnerable euro-area of over £400bn and £300bn respectively and more than four times the UK holdings of sovereign debt. The capital positions of banks in the UK have improved in 2011. UK banking sector leverage has decreased sharply from a multiple of over 40 times in 2008, to just over 20 times in 2011 (Chart 27). Bank leverage is set to decline further as banks transition to higher capital requirements under Basel III. The Financial Services Authority (FSA) has also imposed stringent capital regulations, liquidity regulations and risk management practices. The FSA plans to phase in the new regime in several stages, over several years.
12
quarterly % change 25 20 15
Lending to households
10 5 0 -5
Lending to PNFCs
-10
2001 2003 2005 2007 2009 2011 sterling loans to the household sector 2 All currency loans to private non-financial corporations (PNFCs) Source: Bank of England, TheCityUK calculations 1
www.thecityuk.com
banKing
may 2012
independent Commission on banking
Chart 29
On 16 June 2010, the Chancellor of the Exchequer announced the creation of the independent Commission on banking. The Commission was asked to consider structural and related non-structural reforms to the UK banking sector to promote financial stability and competition, and to make recommendations to the government by the end of September 2011.
value of assets, $ trillion 9,000 Foreign banks 8,000 UK banks
The final recommendations focused on creating a more stable and competitive basis for UK banking for the long-term. according to the Commission, more stable banking requires a combination of measures. it requires that UK banks should have more equity capital and loss-absorbing debt – beyond what has been internationally agreed – and that their retail banking activities should be structurally separated, by a ‘ring-fence’, from wholesale and investment banking activities. The Commission has said that only ‘ring-fenced’ banks would supply the core domestic retail banking services of taking deposits from ordinary individuals and SmEs and providing them with overdrafts. Ring-fenced banks could not undertake trading or markets business, or do derivatives (other than hedging retail risks) or supply services to overseas customers (in the sense of nonEuropean), or services (other than payments services) resulting in exposures to financial companies. Other activities, such as lending to large domestic nonfinancial companies, would be allowed either side of the fence. The large ‘ringfenced’ banks should have equity capital of at least 10% of risk-weighted assets and corresponding limits on overall leverage. On 19 December 2011 the government published its response to the iCb report. This response agrees with the iCb’s recommendations and outlines how the government will legislate to create a stable banking sector that supports lending to businesses and families, and removes the implicit taxpayer guarantee in the event of a bank failure. The government will implement the iCb’s advice in stages with the full package of reforms completed by 2019.
UK banking sector assets
6,000 5,000 4,000 55% 3,000 2,000 1,000 45%
52%
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1 data for 2010 & 2011 is not entirely comparable to previous years due to the inclusion of figures for building societies Source: Bank of England, TheCityUK calculations
Chart 30 Foreign owned UK banking sector assets % share by country, 2011 (2010)
Other
EU
30% (30%)
Deposits have grown faster than loans since 2009, narrowing the funding gap (customer lending not financed through customer deposits, Chart 31). Credit availability however remained constrained in the UK during 2011, in common with other developed countries. The total amount of lending to the UK corporate sector was down during the year, while lending to households increased slightly (Chart 28). A bank levy on wholesale funding was introduced by the UK Government to encourage prudent behaviour by banks. The levy was set at 0.04% of banks’ liabilities in 2011, rising to 0.07% in 2012. The objectives of the levy are to encourage banks to move to a less risky funding profile lessening reliance on short-term wholesale funding, and to exact a price from banks and institutions for the risks which they pose to the wider economy due to their size, reflecting their too big to fail status.
Assets of the UK banking sector totalled a record £8,119bn at the end of 2011, up 3% on the previous year’s total (Chart 29). In 2011, domestic banks held 52% of overall banks’ assets. The 48% foreign ownership of the remaining assets was a higher proportion than in most other large countries. EU banks’ share of foreign owned UK banking sector assets declined to 38% in 2011 from 48% in the previous year. During this time the share of US banks increased from 18% to 27%. Other regions’ share remained roughly unchanged (Chart 30). Data for 2010 and 2011 is not entirely comparable to previous years due to a change in methodology and the inclusion of figures for building societies
www.thecityuk.com
48%
7,000
38% (48%)
27% (18%) Japan 5% (4%)
US
Total: $3,861bn Source: Bank of England, TheCityUK calculations
banks’ assets and liabilities Over a half of banks assets are held in lending. banks’ other assets consist of a small amount of cash to meet normal deposit withdrawals; short term or easily realisable bills (both Treasury and commercial), investments, claims under sale and repurchase agreements. around 90% of banks’ liabilities consist of sight and time deposits. around a fifth of deposits are held in repos, certificates of deposit, short-term paper and acceptances. The remaining liabilities are primarily made up of non-deposit funds such as shareholder capital and accumulated reserves.
13
may 2012
BANKING
251 foreign banks
government support to UK banks Since 2007, the UK Treasury has made a series of interventions to support the financial stability of UK banking. These interventions supported the broad aims of protecting depositors; maintaining liquidity and capital for UK banks; and encouraging banks to lend to creditworthy borrowers. The most recent estimate (31 march 2011) published by Hm Treasury for current level of support provided to banks, shows a total of £456bn (including a cash outlay of £124bn and guarantee commitments of £332bn). This was significantly down from the peak level of £1,162bn (including support that was made available but not used by a specific institution). This is because some support schemes have closed to new entrants without being used; some of the guaranteed debts and assets in the schemes have matured and been repaid; some guarantees to bank depositors and wholesale funders have been removed; and banks have started to repay some of the Treasury loans. banks participating in the support schemes have continued to make progress towards exiting from the support schemes during 2011. although the banks are ahead of schedule in repaying official liquidity support, the UK government retains large stakes in the financial sector after having injected a cumulative total of over £70bn into several banks, including taking ownership of 41% and 83% of the total share capital of Lloyds banking group and the Royal bank of Scotland as well as nationalising northern Rock and bradford & bingley. in november 2011 it was announced that Virgin money was going to buy northern Rock plc for £747 million.
in bank assets figures in 2011. Building societies are mutual organisations owned by their members and therefore have no external shareholders. Their main business activity is mortgage finance. At end-2011, there were 52 building societies with total assets under management of £330bn.
located in the UK Table 10 Number of banks in the UK End- March Incorporated in the UK UK owned Foreign owned [1] Incorporated outside the UK UK branch of an EEA firm [2] UK service of an EEA firm Outside the EEA [3] Total authorised banks Foreign banks physically located in the UK [1]+[2]+[3]
2000 189 112 77 242 115 --127 369
2009 159 71 88 166 82 5 79 325
2010 156 70 86 162 79 7 76 318
2011 157 72 85 192 86 26 80 323
319
249
241
251
Source: Bank of England, Financial Services Authority
Chart 31 Major UK banks customer funding gap £bn, customer lending not financed Customer funding through customer deposits (bars) gap as % of loans (line) 900
30
800 25 700 600
20
500
Number of banks The UK banking sector consists of UK incorporated banks and foreign banks operating in the UK. UK incorporated banks The number of UK incorporated banks declined to 157 in 2011 from 189 a decade earlier (Table 10). This was due to a fall in the number of UK-owned incorporated banks. During this period the number of foreign owned UK incorporated banks increased from 77 to 85. UK incorporated banks consist of UK and foreign owned banks authorised by the Financial Services Authority (FSA) under the Financial Services and Markets Act 2000 (FSMA). These mainly include commercial banks, investment banks, branches of foreign owned banks and banks operated by retail companies. Foreign banks in the UK London is a major centre for international banking and many foreign banks have located branches and representative offices there. At at the end of March 2011 there were 251 foreign banks that were physically located in the UK, with the majority of these located in the City of London. Most of these banks were from Japan, Germany, US, Italy and Switzerland.
Lending Bank lending can be subdivided into advances, which account for around two-thirds of sterling lending, and market loans which account for most of overseas lending. The outstanding value of total lending totalled £5,196bn at the end of 2011, up 4% on the previous year.
15 400 300
10
200 5 100 0
0 2005 2006 2007 2008 2009 2010 2011-1H
Source: Bank of England, TheCityUK calculations
Chart 32 Industrial breakdown of lending % share end-2011, UK resident bank lending Other Individuals
Manufacturing,2% Real estate
9% 9% 47%
33% Financial intermediation
Total: £2,427bn
Source: Bank of England, TheCityUK calculations
UK banks have gradually increased the resilience of their funding positions
14
www.thecityuk.com
banKing
may 2012
in recent years by reducing their reliance on wholesale markets. In the years leading up to the credit crisis, major banks developed a growing reliance on wholesale money market funding in preference to traditional deposits from customers (Chart 31). In 2008 24% of customer loans or around £900bn was funded through wholesale money markets, much of this from overseas. This has fallen by over £600bn since then, to £273bn or 8.2% of customer loans at end 1H-2011. Personal lending Nearly a half of UK resident bank lending is targeted towards domestic customers. Over the past decade there has been a significant movement away from manufacturing and wholesale and retail trade towards personal lending, particularly mortgage lending. The outstanding value of mortgage lending has remained at record levels since the start of the economic downturn, and totalled £1,218bn at the end of 2011. There has however been a decline in the annual value of net lending for mortgage finance in recent years (Chart 33). A monthly trend analysis for 2011 shows a gradual improvement during the year. Corporate lending has seen a changing pattern in bank lending to companies both in the direction and maturity of lending over the past decade. Financial services increased its share of bank lending mostly at the expense of manufacturing and wholesale and retail trade while the maturity of lending has shortened. Foreign-owned banks account for around a third of lending to the corporate sector. Since 2005, UK companies have raised funds of £445bn from financial markets – including bank finance (£177bn), bonds (£10bn), stock markets (£208bn) and private equity (£51bn). The monthly flow of funds raised by UK business has decreased since the start of the economic downturn (Chart 34). This was not only the case with bank lending, but also with other sources of finance such as equity, bonds and commercial paper. Following a period of discussion between the UK Government and the major UK banks, known as 'Project Merlin', a statement was made by the banks in February 2011. As part of that, the banks stated a capacity and willingness to lend £190bn of new credit to business in 2011, with £76bn of this lending capacity allocated to small and medium-sized enterprises. The Bank of England aggregates and publishes the Merlin facilities data. Overall targets are being met or exceeded by all banks participating. Data for 2011 shows that gross lending facilities to SMEs totalled some £74.9bn during 2011 with gross lending facilities of £214.9bn (Table 11). The banks have also announced additional support of £1.2bn to support regional growth and the Big Society. Of this the banks will provide £200m of additional capital over two years to set up the Big Society Bank.
Chart 33 Mortgage lending by major UK lenders £bn 20
Other Remortgaging House purchase
15
10
5
0
2008
2009
2010
2011
Source: Bank of England
Chart 34 Net funds raised by UK businesses £bn, monthly net funds raised 40 30 20 10 0 -10 -20 -30 -40
2007
Loans
2008 Equity
2009
Bonds
2010
Commercial paper
Total
Source: Bank of England, TheCityUK calculations
Chart 35 External business of banks operating in the UK amounts outstanding, $bn 8,000 7,000 6,000
Overseas business A substantial proportion of UK bank lending is targeted towards overseas Table 11 customers. This is Lending to UK businesses by large UK banks1 largely due to the £bn, ‘Project Merlin’ data substantial presence of Q1 Q2 Q3 Q4 2011 foreign banks in the UK Gross lending facilities 47.3 53.0 57.4 57.2 214.9 of which and London’s role as a gross lending facilities to SMEs 16.8 20.5 18.8 18.9 74.9 major international includes Barclays, HSBC, Lloyds Banking Group, RBS financial centre. and Santander. Source: Bank of England External business of
2011
41%
5,000
Other
4,000 38% 3,000 2,000 Total developed countries
1,000 62% 0
59%
2004 2005 2006 2007 2008 2009 2010 2011
1
www.thecityuk.com
Source: Bank of England, TheCityUK calculations
15
may 2012
BANKING
Remuneration Remuneration is a key business issue and one that has been attracting considerable attention across all business sectors. banks, like many other businesses, have a policy of paying bonuses to reward staff for meeting objectives. The Centre for Economics and business Research (CEbR), estimates that £7.3 billion will be paid by the UK banking sector for remuneration purposes in 2012. This total is 4% lower than in 2011 and considerably less than the £11 billion paid before the financial crisis in 2007.
Chart 36 Industrial breakdown of deposits % share end-2011, UK resident bank deposits Other Manufacturing, 2% 9% Real estate 5%
42%
The Financial Services authority (FSa) has published a Remuneration Code that requires large banks, building societies and broker dealers in the UK to establish, implement and maintain remuneration policies consistent with effective risk management. The code specifies that it is expected that firms will not enter into contracts with individuals which provide guaranteed bonuses for more than one year. it is also expected that for senior employees two-thirds of bonuses will be spread over three years. TheCityUK is set to launch a ‘Fairness in Finance’ initiative to address this issue. This will seek to engage members of the public, consumer champions and business leaders to discuss what an effective and sustainable remuneration policy should look like.
banks operating in the UK fell sharply at the outset of the credit crisis but has remained fairly stable since then (Chart 35). Amounts outstanding totalled $6,029bn at the end of 2011 up 2% on the previous year but down from a peak of nearly $8,000bn in Q1-2008. The largest borrowers from banks in the UK were customers in the US with 19% of the total, followed by those in Switzerland with 9% and Germany 8% and France 4%. Deposits The outstanding value of deposits in UK banks totalled £7,261bn at the end of 2011. This was up 2% on the previous year due to growth in foreign currency deposits. Domestic banks accounted for 51% of total UK deposits at the end of 2011. The dependence of UK banks on domestic retail and corporate customers means that the majority of their funds are in sterling. Nevertheless, around 40% of domestic banks’ assets were held in foreign currency (Chart 37). This is because a large proportion of funds are handled on behalf of foreign customers through the wholesale markets. The main non-bank source of banks' domestic deposits are personal savings. Personal customers accounted for 42% of total deposits. ‘Other financial institutions’ (OFI) account for a further 42%. Real estate companies, insurance companies, pension funds and manufacturing companies generated most of the remainder. Other deposits, which cannot by their nature be attributed to individual sectors, consisted of certificates of deposit, other short-term paper and acceptances.
Financial intermediation
42% Individuals
Total: £2,340bn
Source: Bank of England, TheCityUK calculations
Chart 37 Deposits of UK and foreign banks % share, breakdown by currency Foreign banks
UK banks
100 17%
21% 46%
6%
75
50% 19%
50 77%
29%
27%
28%
60%
25
0
23%
1999
2011
Sterling
1999
2011
Euro
Other
Source: Bank of England, TheCityUK calculations
Chart 38 Net income £bn, annual total (Major British Banking Group)
50
40
40
30
30
20
20
10
10
Overseas banks located in the UK held slightly under a half of total UK deposits in 2011. Banks from EU countries, mostly from Germany, Switzerland and the Netherlands, held 38% of the foreign countries’ total. US banks held 27% and Japanese 5%. Since overseas banks are predominantly serving an overseas customer base only a quarter of their deposits were held in sterling (Chart 37).
Income Although no collective data on profits are published for the
0
0 -10
-10 Provisions Pre-tax profits/loss Net income
-20 -30
-20 -30 -40
-40 -50
2000
2002
2004
2006
2008
2010
-50
Source: British Bankers' Association
banking industry as a whole, aggregated data for the Major British Banks’
16
www.thecityuk.com
banKing
Group (MBBG) provides a good indication of overall trends. Financial results of the MBBG for 2010 show a net profit after operating expenses, of £45.8bn. This was the second successive year in which net profits exceeded £40bn and follows a net loss in 2008 of £7.9bn (Chart 38). The results of the UK’s largest banks in 2011 highlighted the difficult business environment for the lenders. Combined profits of five major banks in the UK (Barclays, RBS, LLoyd’s, HSBC and Standard Chartered) totalled around £18.9bn in 2011. This down from £22.2bn in the previous year, mainly a result of large one-off items, including the impact of provisions for Payment Protection Insurance claims and sovereign debt losses. Barclays Bank reported a statutory profit before tax of £5.9bn, HSBC £13.2bn and Standard Chartered £4.2bn. RBS and Lloyds on the other hand reported losses of £0.8bn and £3.5bn respectively. Competitive pressures have reduced net interest margins in most banks over the past decade. This is a result of new players entering the market, including non-financial services companies such as retailers and motoring organisations, and overseas firms. In the decade up to 2010, average net interest margins declined from 2.0% to 1.0% (Chart 39). Competition has resulted in considerable pressure on operating expenses which fell from 2.0% of total assets to 1.2% during this period. Cost reduction has been an important factor in making UK banks, which are among the most efficient in Europe, competitive internationally. UK banks benefit from a flexible labour market, technology investment, outsourcing and offshoring.
Largest UK banks The number of UK incorporated banks has been on a downward trend since the mid-1990s (Table 10) despite the conversion
Payments and settlements system The majority of transactions are still made in cash although the proportion is falling steadily. Technology has become increasingly important for the remaining transactions which include cheques, automated payments and plastic cards. The clearing process involves the transmission and settlement of payments between accounts held at different banks or different branches of the same bank. Payment systems can broadly be divided into clearing networks and plastic card networks. Clearing networks in the UK include: bankers automated Clearing Services (baCS) for direct debits, direct credits and standing orders; real time gross settlement which is cleared by the Clearing House automated Payments Scheme (CHaPS) and the Cheque and Credit Clearing Company (CCCL). Plastic card networks cover debit, credit and aTm cards. The number of non-cash transactions made in the UK including credit and debit cards, direct debits, standing orders and cheques has risen nearly threefold from 4.7bn in 1990 to 14.5bn in 2011. This was equal to an average of 230 transactions for each person in the UK during 2011. The value of cleared payments increased slightly during 2011 to £69 trillion (Chart 40). automated payments accounted for over three-quarters of the volume of transactions and 99% of the value of transactions. The number of cards in issue by banks totalled over 170m at the end of 2010 (Chart 41). Debit cards have become increasingly popular since their launch in 1987, reaching over 85m in 2010. both the number of debit card users and the number of payments made with each card are expected to grow. it is difficult to draw conclusions regarding the number of other cards in issue because of their dual functionality with, for example, many debit cards functioning also in aTms and for cheque guarantee.
www.thecityuk.com
may 2012
Chart 39 UK banks’ interest margins & operating expenses % of total assets (Major British Banking Group)
3.5 Operating expenses
3.0 2.5 2.0 1.5
Interest margins
1.0 0.5
1992 1996 2000 2004 2007 2010 1994 1998 2002 2006 2008
Source: British Bankers' Association
Table 12 Largest UK banks Tier one capital 133.2 94.1 83.8 73.8 34.3 17.0 11.7 4.1 3.7 3.2 2.4 2.0 2.0 1.5 1.3
$bn, end-2010 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
HSBC Holdings Royal Bank of Scotland Barclays Lloyds Banking Group Standard Chartered Santander UK Nationwide Building Society1 Clydesdale Bank2 FCE Bank The Co-operative Bank Yorkshire Building Society Investec Bank3 Schroders Standard Bank Coventry Building Society
Assets 2,455 2,275 2,331 1,552 517 474 294 70 22 71 47 30 21 31 35
4/2010; 2 9/2010; 3 3/2011 Source: The Banker
1
Chart 40 Value and volume of cleared automatic payments £ trillion, value of cleared payments (bars) 150
120
90
60
30
0
2001
2003
2005
2007
2009
2011
Source: Payments Council
17
may 2012
BANKING
Electronic delivery channels Electronic delivery channels include aTms, internet banking, corporate electronic banking, interactive TV and mobile telephone banking. The rapid rise of internet services and mobile applications have made electronic delivery channels a key priority area for banks. according to Celent, global banking sector iT spending will grow by 2.8% in 2012 to $173bn. Online banking is expected to be the fastest growing area, with spending rising 5.3%, followed by mobile telephone banking (5%). The percentage of funds allocated to maintenance is slowly declining while new technology investments are rising. Financial services firms are expected to put greater emphasis on innovation in the future to boost customer trust, increase sales and improve services offerings. ATMs Parallel with the reduction of the branch network, there has been a steady increase in the importance of the aTm network. The aTm network increased from less than 40,000 to over 64,000 during the past decade (Chart 42). around a third of aTms are located in branches, a third in retail outlets, with social and leisure facilities accounting for most of the remaining locations. The extension of the aTm network has helped to fill the gaps created by the closure of some branches. People around the UK during 2011 made an average of 5,400 withdrawals every minute of the day throughout the year. Internet banking Online banking is growing in popularity as a delivery channel. The internet has reduced transaction costs and lessened the importance of location. according to Db Research, around 45% of all individuals in the UK used online banking facilities in 2010 (Table 13). Some 44 million customers in the UK have registered for online banking and 38 million for telephone banking. The number of online transactions recorded by major banks has more than doubled to nearly six billion between 2005 and 2010. This meant that an average of 130 online transactions were made by each customer during 2010 (Chart 43). more than 40% of Europeans are expected to use online banking in 2012. The move online is likely to be accompanied by a change in the role of the remaining bank branches where large regional centres that offer financial planning may replace the traditional branch networks. mobile telephone banking is still in its infancy. Currently the most common services used are checking account balances and recent transactions. mobile applications are however at the heart of many new retail banking product innovations and are expect to grow in importance in the coming years. Corporate Electronic Banking is similar to internet banking but is more demanding, requiring greater security, involving a heavier volume of transactions and the ability to support multiple users at a single customer site. Telephone banking remains a key area of service delivery for banks. it includes call centres, call routing, telesales and interactive voice response. Telephone banking can either be used to supplement one of the other channels or as a standalone, primary delivery channel.
Chart 41 Plastic cards Millions in issue 180 Other 160
ATM cards
140 120 Debit cards
100 80 60 40
Credit cards
20 0
2000
2002
2004
2006
2008
2010
Source: APACS
Chart 42 Branches and cash dispensers in the UK Thousands 80 70 60
Cash dispensers
50 40 30 20 Number of Branches 10 0
2001
2003
2005
2007
2009
2011
Source: Payments Council, British Bankers’ Association
Chart 43 On-line transactions in UK banking Billions of transactions each year
of a number of building societies into banks and an increase in the number of new entrants into the market. The largest banks are the major highstreet banks (Table 12), namely HSBC Holdings, Royal Bank of Scotland, Barclays Bank and Lloyds Banking Group. These banks dominate the UK current account market and account for over half of credit cards and personal loans. Branch networks remain an important point of service delivery for banks. Technology is having a major impact on banking in creating new ways in which banks are delivering services to their customers. The competitive pressures on banks’ margins have kept the focus on cost control as a strategic priority. This has resulted in the reduction of the branch network. Many banks are seeking to reduce costs through a combination of outsourcing and offshoring.
18
6
5.80 5.06
5 4.36 4 3
4.52
3.59 2.72
2 1 0
2005
2006
2007
2008
2009
2010
Source: British Bankers’ Association
www.thecityuk.com
BANKING
Operations have in some cases been centralised, allowing lower unit processing costs. Staff numbers have been reduced in some branches and the profile of the work carried out by branch staff has been more oriented towards sales. During the past decade the number of branches in the UK fell by over a quarter, to below 10,000 (Chart 42). The Post Office role as a banking distribution channel has been expanding given that it is the largest cash handler in the UK. A number of banks have established partnerships with the Post Office, which allow their customers to use these offices for their basic banking needs. More than 95% of the 8,438,000 Basic Bank Accounts at the end of 2010 were accessible at Post Office counters (Chart 44).
CONTRIBUTION TO THE UK ECONOMY The UK banking sector is a crucial and integral part of the UK economy. Its core business of taking deposits from one set of customers and lending to a largely different set provides an essential market mechanism for distributing funds to where they are most required and providing a return to those wishing to hold assets in liquid form. A modern economy could not operate without this mechanism, but its ‘value’ is difficult to measure statistically.
may 2012
Table 13 Online banking
Norway Netherlands Iceland Finland Sweden UK US Germany Ireland Spain Poland Italy Greece
Source: DB Research, Eurostat, Forrester Research, Pew 2011
Chart 44 Accounts accessible at Post Office counters Billions of transactions each year Other accounts 9
Output The banking industry contributed around £56bn to UK national output in 2010, or 4.8% of Gross Domestic Product (GDP), over half of the 8.9% accounted for by the financial sector as a whole. Activity in the banking sector has been more volatile than other sectors over the past decade, mainly due to the sensitivity of banking profits to the business cycle.
Online banking adoption, % of all individuals (2010) 83 77 77 76 75 45 45 43 34 27 25 18 6
Accounts accessible at Post Office counters 0.38 0.38
8 7
3.51
6 3.78
5
3.84 8.05
4.02
4
7.45
3
Employment The UK banking industry provided employment for 454,200 (Table 14) people at the end of 2010. This represented around 1.6% of total UK employment. During the past decade, banks have made considerable efforts to reduce costs including staffing which typically accounts for over half of operating expenses. The regional breakdown shows that London accounted for 31% of UK employment in banking or some 141,000. It was followed by North West 10%, Yorkshire 10%, Scotland 9%, South West 8% and the South East 8%. Other cities outside of London with large employment in banking included Edinburgh (15,100), Leeds (14,500) and Birmingham (12,500).
4.17
2 2.37
1 0
2005
2.87
2006
3.48
2007
2008
2009
2010
Source: British Bankers’ Association
Chart 45 UK banks’ net exports £m
A breakdown of employment statistics for member banks of the British Bankers’ Association in 2010 shows that retail banks accounted for 76% of total employment (398,000). Foreign subsidiaries and branches accounted for a further 21,200 (down from 30,700 two years earlier), global banks for 34,600 (37,100), investment banks for 8,600 (8,700) and other domestic banks for 30,100 (24,500).
32,000
Net exports and investment Net exports of banks totalled £24.7bn
12,000
in 2010, down from £27.8bn in 2009 and a high of £33.2bn in 2008 (Chart 45). Latest available data shows that UK financial services net exports increased to £37.9bn in 2011 from £35.7bn in 2010. Banks probably accounted for around three-quarters of this, indicating that their contribution increased in 2011.
www.thecityuk.com
Other non-fin. service earnings
28,000 24,000
Net fee income from financial servs.
20,000
FISIM
16,000
8,000 Spread earnings
4,000 0
1998
2000
2002
2004
2006
2008
2010
Source: ONS, Bank of England
19
may 2012
BANKING
The contribution of banks to financial sector exports overall has been much higher in the past four years than previously. This is due to greater FISIM exports and spread earnings, which combined made up 80% of banks’ net exports in 2010. The contribution to banks’ net exports comes from four sources: spread earnings; FISIM; net fee income from financial services; and other net exports from non-financial services: -
Spread earnings of banks from securities, derivatives and foreign exchange transactions fell to £10.5bn in 2010 from £12.6bn in 2009. Derivatives generated £5.3bn in 2010, just over a half of spread earnings during the year.
-
FISIM exports of banks fell by 11% in 2010 to £9.3bn having dropped by over a third to £10.4bn in 2009 from £15.7bn in 2008, as margin on loan and deposit rates was reduced.
-
Banks’ net fee income on financial transactions fell to £3.7bn in 2010 from £4.0bn in 2009. This includes fee income from investment management & securities transactions, loans & commitment fees, current account services and derivatives transactions. Loans and commitment fees form the largest portion at £1.8bn.
Table 14 Regional contribution of the UK banking sector Thousands London North West Yorkshire Scotland South West South East West Midlands East Midlands East North East Wales North Ireland Total
Banks’ fee income from other non-financial transactions recovered to £1.3bn from £814m in 2009.
International comparisons Coverage of trade in services statistics relating to banks may vary between countries. UK data, for example, includes spread earnings and FISIM but these may only be included in part or not at all in other countries’ figures. The UK’s trade surplus in banking and other financial services was $41bn in 2010. The US surplus on banking and other financial services was $42bn in 2010, slightly up on the two previous years. Switzerland’s $14bn trade surplus in 2010 was also stable. Foreign direct investment into the UK banking sector more than doubled over the past decade to reach £63.3bn in 2010 (Chart 46). During this period outward direct investment grew more than five-fold to £83.4bn.
Tax contribution In 2011 the UK financial services sector as a whole had taxes borne of £27.6bn and also collected total taxes of £35.4bn. Adding together these figures gives a total tax contribution of £63.0bn from the sector, representing 12.1% of all government receipts (Chart 47). Banks are the largest taxpayers in the financial services sector. By number, banks were 37% of the financial companies taking part in the 2011 City of London Corporation Total Tax Contribution study; they paid 72.8% of the total taxes borne; and 66.5% of the total taxes collected. The banks are also the largest employers and generate the largest employment taxes.
GVA 23,125 4,410 3,875 4,439 3,199 5,387 2,908 2,268 2,575 1,473 1,167 680 55,507
Number of local units 3,495 2,308 1,597 1,678 1,774 2,663 1,624 1,287 1,575 712 927 143 19,783
Source: Office for National Statistics
Chart 46 Banks foreign direct investment £bn
90
Inward
80
-
Employment 141,300 45,900 45,300 40,900 35,800 35,200 31,300 21,100 18,600 15,600 13,400 9,800 454,200
Outward
70 60 50 40 30 20 10 0
2000 2002 2004 2006 2008 2010 2001 2003 2005 2007 2009 Source: Bank of England
Chart 47 Tax contribution of UK financial services £bn, year ending March (bars) 80 70 60
% share of UK Government receipts (line) 14 12 10
50 8 40 6 30 20 10
4 2
0 2008 2009 2010 2011 Source: PricewaterhouseCoopers/City of London Corporation 0
20
www.thecityuk.com
OTHER SOURCES OF INFORMATION Bank for International Settlements International Banking and Financial Market Developments (Quarterly) www.bis.org Bank of England Financial Stability Report Monetary and Financial Statistics www.bankofengland.co.uk British Bankers’ Association Annual Abstract www.bba.org.uk Dealogic Investment banking statistics www.dealogic.com European Banking Federation www.fbe.be Financial Services Authority www.fsa.gov.uk
International Monetary Fund www.imf.org Merrill Lynch / Capgemini World Wealth Report www.ml.com Office for National Statistics UK National Accounts - Blue BookUK Balance of Payments - Pink Book www.statistics.gov.uk The Banker Top 1000 World Banks - July edition www.thebanker.com The Boston Consulting Group www.bcg.com UK Payments Administration www.ukpayments.org.uk
SPONSOR Huntswood Matt Hodey Commercial Director email: [email protected] tel: +44(0)7584587025 www.huntswood.com
SIGN UP FOR NEW REPORTS If you would like to receive immediate notification by email of new TheCityUK reports on the day of release please send your email address to [email protected]
DATAFILES Datafiles in Excel format for all charts and tables published in this report can be downloaded from the Reports section of TheCityUK’s website www.TheCityUK.com
THECITYUK RESEARCH: Report author: Marko Maslakovic For further information about our work, or to comment on the programme/reports, please contact: Duncan McKenzie, Head of Research [email protected], +44 (0)20 7776 8976 Marko Maslakovic, Economic Research Senior Manager [email protected], +44 (0)20 7776 8977 TheCityUK, 65a Basinghall Street, EC2V 5DZ www.TheCityUK.com © Copyright May 2012, TheCityUK
MEMBERSHIP To find out more about TheCityUK and the benefits of membership visit www.thecityuk.com or email us at [email protected]
This report is based upon material in TheCityUK Limited’s possession or supplied to us, which we believe to be reliable. Whilst every effort has been made to ensure its accuracy, we cannot offer any guarantee that factual errors may not have occurred. Neither TheCityUK Limited nor any officer or employee thereof accepts any liability or responsibility for any direct or indirect damage, consequential or other loss suffered by reason of inaccuracy or incorrectness. This publication is provided to you for information purposes and is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or as the provision of financial advice. Copyright protection exists in this publication and it may not be reproduced or published in another format by any person, for any purpose. Please cite source when quoting. All rights are reserved.
