Boom times are back as banks rake in £24 bn
MoS analysis finds Big Four profits soar 85% – to their highest since crisis began in 2007
BRITAIN’S top banks are poised to reveal their biggest profits since the financial crisis erupted in 2007, detailed analysis by The Mail on Sunday shows.
Figures out this week are tipped to indicate that Lloyds, Barclays, HSBC and RBS made a combined profit of £23.9billion last year – an astonishing 85 per cent increase on the previous 12 months when the figure was just £12.9 billion.
Lloyds will lead the way by revealing its biggest ever profit for a single year, according to a consensus of analyst forecasts.
The last time the four biggest lenders made more than £20billion was 2007 – the year Northern Rock went bust – when profits hit a combined £26.4 billion.
Ever since then, the four have been weighed down heavily by legal costs, payment protection insurance compensation and various bills for mis-selling and misconduct. PPI compensation alone has wiped around £30billion off their balance sheets, while legal settlements have cost them £49.3billion since 2009, MoS analysis found.
These costs are finally starting to tail off as banks move on from a torrid decade.
Lenders were also boosted last year by rising wages, low unemployment and diminished price inflation in the shops, which helped to keep family finances buoyant. That created favourable conditions as fewer borrowers defaulted on their loans.
Experts said the return to the boom-era profits would enable all four banks to return huge sums to shareholders.
However, they warned that the uncertainty around Brexit loomed large and posed a significant threat to future profits and dividend payouts.
Ian Gordon, banking analyst at Investec, said: ‘One thing you are really going to see accelerating from now on is the level of capital return from banks, whether through share buybacks or dividends.’
But Laith Khalaf, senior analyst at Hargreaves Lansdown, warned: ‘Banks are exposed to Brexit and any possible change in government.
‘So the thing that is really going to hold banks back is beyond their control. That explains why their stocks are near the bottom of investors’ lists at the moment.
‘However, if we do get a good Brexit outcome we should see a rally for RBS and Lloyds.’
Banks often highlight their pretax profits, but our analysis focuses on post-tax profit to reflect the final bottom line.
On Friday, 62 per cent taxpayer-owned RBS unveiled a 47 per cent rise in post-tax profits to £2billion and announced plans to hand £1.6billion to shareholders.
Of this, £977 million will be returned to the Treasury, its largest shareholder.
Global banking powerhouse HSBC is set to book post-tax profits of £12.7billion, up 44 per cent from £8.8billion the year before.
Barclays is tipped to reveal that it is returning £1billion to investors through a dividend of 6.5p per share as it swings to a £4.6 billion post-tax profit.
However, these profits will be knocked by a £400 million charge for PPI compensation and a £1.6billion settlement with the US Department of Justice.
Lloyds is on track to report record profits, with analysts forecasting a 30 per cent rise in post-tax profits to £4.6billion.
The high street bank, which has been shelling out billions in compensation for mis-selling PPI, is also forecast by some analysts to announce a £2billion share buyback, whereby the bank will repurchase shares to return value to investors. Barclays’ investment bank will also be in focus as chief executive Jes Staley battles with activist investor Edward Bramson, who wants to scale back the division.
Bramson has demanded a seat on the board but requires approval from Barclays’ shareholders. The year-end results are likely to form a key part of his pitch to win them over.
UBS analysts have forecast revenues in Barclays’ corporate and investment bank fell 2 per cent to £9.7 billion for the year.
However, the analysts forecast that profits rose 37 per cent to £2.6billion for 2018, a boost that would help Staley as he seeks to defend the unit.
SITTING in a plush modern office in the heart of the City, Anne Boden has just pinpointed the moment she realised quite how much the public had come to despise bankers. It was 2012 and the woman who would go on to found Starling Bank, a digital start-up, was on her way to interview for the most high-profile job of her career so far – chief operating officer of Allied Irish Bank.
‘I got into a taxi and the driver asked me what I did,’ Boden recalls. ‘I said I was going to see a bank I wanted to work for – and the atmosphere changed, he just stopped talking to me. It dawned on me then how much pain the banks had caused. After that, I took the view that you just don’t say you’re a banker, particularly in Ireland. I just told people I worked in technology.’
That wasn’t actually so far from the truth: Boden would indeed get the job overseeing Allied Irish’s systems. She had also trained as a computer scientist at university.
But if an awkward taxi journey shortly after the global recession was understandable, Boden says the years that followed were less so. Despite public outrage at the reckless lending, mis-selling and boardroom greed that triggered the great crash of 2008, the banking industry did not seem to want to put customers back at the heart of their operations.
To Boden, who had started her career in a Lloyds branch, this was a terrible error of judgment.
‘Banks were so focused on getting rid of their bad loans and reducing their staff headcount that they’d forgotten about customers,’ she says. ‘Customers had changed – but banks hadn’t noticed.’
By 2014, she had quit Allied Irish and sold her house to fund the launch of Starling. ‘Banking was broken and I couldn’t fix the old system – so I decided to build a new one,’ she says.
The company’s office in Moorgate, where we meet, is testimony to that break from the past.
The office used to be a UBS trading floor, but is now decorated with the same quirky furniture and table-tennis table you might expect to see at Google’s headquarters. Bowls filled with badges saying ‘#MakeMoneyEqual’ are dotted on every table top. The atmosphere is informal, too. Staff work on laptops so they can move between desks easily and John Mountain, Starling’s chief information officer, roams the room to talk with employees rather than being stuck in an executive corridor.
He even steps in to hold the flash for the photographer as Boden’s picture is taken and a colleague jokes that it’s the first piece of work he’s done that day.
In fact, the only evidence of a link to the pre-crisis era is a defunct trading-floor clock which has had a Starling bank logo slapped on it.
Colleagues in banking thought Boden was crazy trying to launch a new brand from scratch. She says they visibly backed away from her at cocktail parties when she announced her news. But she was far from alone in spotting an opportunity to take on the big players.
Monzo, Tandem, Metro, Atom and numerous others are trying to lure customers away from RBS, Lloyds, Barclays and HSBC, which together still control more than seven in ten current accounts.
Boden, who reads a book a week (and managed eight over Christmas) for ideas, knows she needs to make Starling stand out from an increasingly crowded field.
First and foremost, she says, Starling must push the boundaries of what customers can do.
Its smartphone app already shows the bank’s 460,000 current account customers how and where they spend money each month. Boden is excited about the idea of customers being able to talk to the app using devices such as Amazon Alexa, the digital home assistant. And she can envisage customers one day doing their banking on the road by talking to self-driving cars.
Having studied computer science at Swansea University before starting out as a graduate trainee at Lloyds, she is certain big banks will fail to keep up. ‘I used to code [computer] programs for the Lloyds bank systems,’ she says. ‘As the banks got bigger, they bolted on new things on to their old systems – a new software package, or a new business they’d acquired.
‘And the structures became so complex that it became difficult to change anything. It was like spaghetti – if you pull one string, it gets stuck. You can’t untangle it.’
Starling has come a long way since Boden’s idea got off the ground in 2015.
She was approached by billionaire fund manager Harald McPike, who has so far invested £83 million in the business, and the bank launched two years later in 2017. McPike’s background in data analysis drew him to Boden’s idea to use data to help customers plan their spending. Starling has just raised another £75million from investors including Merian Global Investors as it bids to launch new products and expand into Europe.
It already offers personal loans and Boden tells me a credit card is next, with a launch planned by the end of the year. For a new bank, finding a way to lend out deposits is crucial in turning a profit.
Starling also has 30,000 business customers, and is awaiting news of whether it has secured part of a £425 million fund from RBS to expand its business lending. Boden wants to scoop up 10 per cent of the market in the long-term – or half a million customers. One of Starling’s innovations will be matching relationship managers to businesses through a ‘speed dating’ service on its app. Another of Boden’s bright ideas is selling the company’s technological expertise to other firms.
The bank already has a contract to provide payment processing services to the Department for Work and Pensions. The contract relates to the department’s Prove Your Identity scheme. Starling enables the DWP to send 1 pence to a person’s bank account to prove the individual is associated with that account.
Boden says that by keeping costs low – Starling doesn’t have any branches – the business should break even in 2020.
She hopes to stand out from the likes of Monzo by pitching Starling as a mainstream bank for customers across the UK, not just digital-savvy millennials in London. She also wants to pitch Starling as a full-blown bank, with all the bells and whistles customers have come to expect – not just a prepaid card. She adds: ‘And we’re actually growing faster outside of London than inside it, so it’s a wider and older demographic.’
If Boden realises even some of these lofty ambitions, she can surely expect more customers to flock from bigger rivals to her bold new competitor. RBS, Lloyds and the rest – you have been warned.
It dawned on me in a taxi just how much pain the banks had caused
We’re growing faster outside of London – we have a wider demographic