Diversification drives bank profits, says KPMG

Profit growth in wholesale, wealth management, investment banking and international banking markets have been key factors in the growth of UK banks, KPMGs UK financial institutions performance survey reveals.

The survey compares the annual results of HBOS, Royal Bank of Scotland, Lloyds TSB and Barclays.

Pre-tax profits increased by 20.3% year-on-year ending December 2006 at 26,276m.

Profits ranged from 11% at Lloyds TSB to 35% at Barclays, while total assets were up 9.8% to 2,802.8bn.

Barclays earns over half its profits overseas, while for RBS it is 46% and HBOS earns 15% of its profits from abroad.

In the retail banking market there have been improvements, although margins have modestly declined in mortgages and asset quality has fared well as house prices continue to increase.

Margins have continued to decline somewhat compared with the previous year, as a result of a number of factors in the retail sector, such as strong growth in finer margin products like mortgages and savings as well as a lower demand for unsecured lending.

However, the more diversified banks have been able to more than compensate from their wholesale or international operations.

The cost to income ratio fell by 1.5% from December 2005.

In terms of asset quality, wholesale banking and secured retail banking performed well, although provisions for unsecured lending have increased significantly but with a moderation during the second half of 2006.

HBOS had the best credit performance overall, up by only 9% on 2005.

David Sayer, head of retail banking at KPMG, says: Whilst we are still awaiting the HSBC numbers, the other banks have delivered an impressive set of figures so far.

They have demonstrated the diversification of our banks and their ability to withstand difficulties in particular sectors.