The UK’s big banks need to keep a close watch on risks
Less than a week ago, analysts were predicting that the UK’s banks could be about to turn a corner.
Mega-fines appeared to be tailing off, signalling an end to the failings of the past. It was no secret that fresh challenges lay ahead for the sector, notably the costs of ringfencing and IT legacy issues, but the City was confidently expecting some strong results from the reporting season.
That was until HSBC upset the applecart yesterday with a disappointing set of results and a series of stark warnings about the upcoming European elections, potential protectionism from the US, and uncertainties arising from Brexit.
Read more: HSBC shares drop 6.5 per cent as bank reveals 62 per cent profit hit
The other FTSE quoted banks may be very different beasts to HSBC, ranging from a UK-focused retail bank in the form of Lloyds, to Barclays which is keeping a foot in the investment banking camp, and RBS, which has a plateful of problems to digest.
But the warnings from HSBC, Britain’s largest bank, underscore that banks are big, complex companies which are exposed to trends that are very hard to forecast correctly: central bank interest rate decisions, currency movements, stock and bond markets and unpredictable global growth levels.
Read more: HSBC reveals it's being probed over money laundering issues
Little wonder that Russ Mould, investment director at AJ Bell, says that banks are really in the risk-management business.
This is not something they have always performed well at in the past. The reason that compliance costs are growing and ringfencing costs exist is because behaviour in the run up to the credit crunch was far, far too risky. Mould suggests banks become like the quasi-utilities of the past: safe and steady providers of credit.
Read more: Banks fear rising risk costs are just around the corner
Less risk may well mean lower growth, but if that spells more stable profits, fewer provisions and fatter dividends, the benefits could be substantial to customers and shareholders alike. Nearly a decade on from the credit crunch, banking is still in transition.
How it all ends for the UK’s banking behemoths, and their shareholders, is in their own hands as much as regulators.
What is required in the face of numerous challenges is constant vigilance around risk, as well as adaptability. Otherwise, the fines, losses and writedowns will continue and the spectre of another crisis will haunt the sector.