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Credit crunched

27 Mar 08

The full damage to the main UK banks from the sub-prime debacle in the US is revealed in a survey from KPMG

by Richard Goslan

Whether you call it the credit crunch, or market dislocation, the impact of the collapse of the sub-prime mortgage market in the US has hit Britain’s banks to varying degrees.

The good news, according to KPMG’s UK Financial Institutions Performance Survey (FIPS) for 2007, is that losses for the UK’s big five banks have been modest in comparison with those at their US and European counterparts.

The survey considers the financial position and performance of HSBC, RBS, Barclays, HBOS and Lloyds TSB. Overall pre-tax profits for the year to December 2007 were up 0.7 per cent, to £38.5 billion.

Some banks managed modest profit growth on a statutory basis (RBS up 8 per cent, HSBC up 9 per cent on a dollar basis, in spite of significant increased impairments) but others recorded a fall in statutory profit before tax (Lloyds TSB down 6 per cent, HBOS down 4 per cent) and Barclays was largely unchanged.

Impairment charges on loans and advances have increased significantly at all the banks, by 63 per cent at HSBC and by 13 per cent at RBS. Recent market dislocation has resulted in further impairments and fair value losses.

Barclays recorded £840m of the market dislocation losses in the impairment line, with a further £1.5 billion through other items on the income statement, offset by a £658m revaluation of its own debt.

Lloyds TSB reported no direct exposures to sub-prime US securities, and limited indirect exposure, and recorded losses of £280m from market dislocation in the income statement. Impairment charges were £1.8 billion, up 15 per cent.

HBOS recorded an impairment charge up 15 per cent compared with 2006, much of it due to increased unsecured impairments at retail (up 18 per cent) and corporate (up 40 per cent). Fair value adjustments of £227m were incurred in net trading income due to market dislocation.

RBS reported impairment losses in trading income of £2.13 billion (2006: £1.88 billion), and write-downs in the global banking and markets division of £1.89 billion in relation to market dislocation, net of fair value adjustments on own debt of £275m.

HSBC was one of the first banks to announce losses in the US sub-prime market, with loan impairments in the region of £5.8 billion in 2006, much of it from cases where HSBC was originator. This was caused by falling house prices combined with adjustable rate mortgages rising, which caused more delinquencies. Much of the losses were in more recent loans as house price rises slowed, leaving borrowers without refinancing options.

KPMG predicts that the impact of the sub-prime collapse in the US will be felt for years, as the lending positions underpinning portfolios wind down.

It also says one of the most disturbing aspects of the Northern Rock case was the speed with which customer panic set after the announcement that the Bank of England was providing support. That, says the report, will make it difficult to restore public confidence in the banking sector.

Every bank will now take care to ensure not only that it is behaving prudently, but also that it is seen to be doing so. Non-executive directors have had a reminder that their role is to question executives’ strategies very closely, the report says. Any business model that varies from the norm will be subject to close scrutiny and executives will be forced to behave more cautiously.

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