financial reporting european banks 2010v2

8/2/2019 Financial Reporting European Banks 2010v2

1/76

FINANCIAL SERVICES

Focus onTransparency

Financial reporting of

European banks in 2010

The calm betweentwo storms?

July 2011


2/76

This is the th year o Focus on Transparency, the

KPMG European banking survey o banks annual

reports, where we not only look at certain areas o

accounting policy and disclosure, but also examine

the key issues aecting banks as presented by the

banks themselves.For the rst time we have included a chapter on

chairmen and chie executive ocers statements.

This refects how chairmen see the main topics

presented to shareholders, such as overall perormance,

the role o banks in society, compensation policy,

regulatory reorms and uture trends.

We have also added a chapter on emerging risks

and issues, which incorporates inormation on legacy

risks rom activities linked to the credit crunch, the

emergence o sovereign debt (particularly Eurozone

debt) as a key risk actor, as well as other issues

such as bank levies acing the banking sector.

We have continued to comment on key areas o

disclosure and accounting policy aecting banks,

notably the impact o air value, capital, unding and

liquidity, impairment, and key judgements and estimates.

There were signicant movements in oreign exchange

markets over the last 12 months making like-or-like,year-on-year comparison across the 15 banks in the

report dicult. To eliminate these eects we have used

31 December 2010 exchange rates or both 2010 and

2009 gures. In addition, 2009 gures are based on

2009 comparative gures in the nancial statements

as at 31 December 2010.

There are 15 banks included in the survey, which refect

a large demographic o European banks reporting under

International Financial Reporting Standards (IFRS).

up

nd

d

Barclays

HSBC

Lloyds Banking Gro

Royal Bank of Scotla

Standard Chartere

BBVA

Santander

BNP Paribas

Socit Gnrale

Nordea

ING

Commerzbank

Deutsche Bank

UBS

UniCredit

The ollowing people made signicant

contributions to this publication:

Sophie Sotil-Forgues

Caroline GallagherKenza Bellakhdar

Vesselina Hinovska

Mathieu Mangelinck


3/76

ContentsExecutive summary 1

1. Insights 5

Chairmens and CEOs statements

2. Perormance 11

Focusing on investment banking

3. Impairments 25

Analysis o allowances and write-os

4. Challenges 31

Legacy risks and emerging issues

5. Intangibles 43

Non-nancial assets

6. Capital 47

Regulatory challenges

7. Liquidity 57

Maturity and sources o unding

8. Governance 65

Executive remuneration and governance

Changes ahead 72


4/76

1 EXECUTIVE SUMMARY

Executive

summary

Key fndings

2010 was a less volatile year than 2009

...but with regulatory change cited as one o the most signicant

challenges acing the banks in 2011, and the sovereign debt crisis

adding signicant uncertainty

was 2010 the calm between two storms?

Combinedprotshit85billionattheleading15Europeanbanksin2010, double the previous years prots

but major reductions in impairment charges fattered the bottom line.

Chairmenandchiefexecutivesbelievetheirbanksarewellplacedforrecovery, ocusing on core businesses and relationships

but accept need to rebuild trust and condence while sounding notes

o caution over an uncertain uture.

Retailandcommercialbankingperformanceimprovedamidemerging market activity and economic recovery...

butinvestmentbankingrevenuesfell2%to123billion,duetolower transaction volumes and increased competition.

All15EuropeanbankshaveCoreTier1capitalinexcessoftheminimum8%prescribedbyBasel2butproposedregulatoryrequirementsunderBasel3will

be challenging.

92.5billionofdeferredtaxassetsrecognisedonbalancesheetsimpliesapproximately334billioninfuturetaxableprotsbut the gure remained the same as the previous year, suggesting

urther challenges or the banks.

Banks ace a volatile uture

that will once again placethem under severe strain

2011 KPMG LLP, a UK limited liability partnership, is a subsidiary o KPMG Europe LLP and a member rm o the KPMG network o independent member rms aliated with KPMG International Cooperative, a Swiss entity.

All rights reserved.


5/76

2 EXECUTIVE SUMMARY

The calm between two storms

Driving new changes

Europes leading banks are staring at a

nancial storm that could wreck their ragile

recovery. While some may have hoped that

2010snancialresultsofthe15largestEuropean banks signalled a clear road

ahead, the growing sovereign debt crisis in

the Eurozone could drive that hope away.

Combined with the rising tide o

regulation, restricted liquidity and weakcondence, the banks ace a volatile uture

that will once again place them under

severe strain.

T

at

he2010reportsshowedagreatertention to sovereign debt risk than

in previous years, with speculation o

government bail-outs or Portugal and

Spain, in line with those or Ireland and

Greece. All the banks commented on

this debt, although not all have a

material exposure.

But the speed o developments was notoreseen at the time the annual reports

were being written. While government

bail-outs were discussed in the 2010

reports with Greece receiving unding in

May 2010, Ireland in November 2010 and

Portugal in May 2011 debt restructuring

in the rst quarter o 2011, and its potential

impact on the banking sector, has become

anissueofgrowingconcern.Thelatestround o European Banking Authority

stress tests will require the banks to

disclose sovereign debt exposure by

accounting portolios, maturities and

countries.Thiswillexposethelevelofriskacing the banks, and sovereign debt could

be the vanguard o another banking crisis.

Lower impairments drive profts

Thegoodnewsisthatprotsgrewin2010:thecombinedprotsforthe15bankshit85billionin2010.Thatwasdouble2009sgureof43billion,andavastimprovementon2008scombinedlossesof25billion.Onlyonebankremained in a loss making position, but

even here the losses were substantially

reduced.

Despite this, the banks are rightly cautious,

seeking to avoid any premature optimism

their chairmen and chie executives

acknowledge that the sector is ar rom

out o the woods.

However, a substantial amount o the

increased prots came rom a signicant

decrease in loan impairment charges.

Impairmentsfell29%to80billionin2010.Thesedecreasesappearedtooffsettheeect o reduced revenues, particularly in

investment banking.

Therewereothercontributorstotheincrease in protability. Some o the

banks pointed to strong perormances in

emerging market activities those banks

that are particularly active in Asia and Latin

America benetted rom the continuing

growth in these regions.

Somewhat higher derivative air values

were also reported due to restored

condence and improved trading

volumes, especially in the second hal

o the year. At the same time, divesting

non-core activities and ocusing onclient relationships (a key eature o the

chairmens reports) remained key trends

or the year.

Thedeferredtaxpositionsmeritparticular comment, as on the ace o it

they refect growing optimism. In total,

92.5billionofdeferredtaxassetswereheldonbalancesheetat31December2010,representingaround334billiono prots that will be taxed in the uture,

comparedto90billionat31December2009.Intheseuncertaintimes,theviewon availability o uture prots couldchange quickly, resulting in the potential

write down o some balances.

92.5billionofdeferred

tax assets were held

on balance sheet at

31December2010,

representing

around

334bno prots that will be

taxed in the uture

A substantial amount o

the increased prots

came rom a signicant

decrease in loanimpairment charges




6/76

3 EXECUTIVE SUMMARY

Views rom the top

For the rst time, our survey looks in

detail at what is being said by Europes

banking leaders. We have reviewed the

chairman and chie executive statements

and ound there is a moderate sense o

growing, albeit muted, condence, with

reerences to substantial improvement

and a time o progress and renewal.

In these statements, the chairmen andCEOs address a number o varied topics

relating to the past and coming years.

Common issues include the overall

perormance o their bank during 2010

in the context o the economic and

market conditions, the role o the bank

in society, compensation policy, and

some o the years challenges, notably

regulatory reorms. As or trends ahead,

the main topics are uture perormance

and strategies, the economic outlook and

anticipated challenges.

For all the banks, 2010 is reported as asuccessfulyearcomparedto2009,with

allbaronenowshowingaprot.The

statements provide an indication o the

key drivers or this success there has

been an improvement in income in some

activities, coupled with the decrease o

risks and costs through, or example,

synergies in the businesses.

Quality capital

All the banks disclosed their Basel 2

capital adequacy ratios, which increased

overallwithanaveragerateof14.83%in2010comparedwith14.41%in2009.Most o the banks also calculated and

voluntarilydisclosedtheirCoreTier1ratioinpreparationforBasel3standards.All the banks that chose to do so showed

animproved

ratio

compared

to

2009,

refecting an increase in the quality o

capital held mainly due to the

combined eect o a net increase in

2010 results and a conservative dividend

policy.In2009,bycontrast,CoreTier1capital increases were more the result

o share issuances and state support.

First quarter 2011 statements tend

to conrm the ongoing reinorcement

o this ratio due to notably strong

quarterly results, capital issuances, or

management o risk weighted assets.

WiththecoreprinciplesofBasel3nowmapped out ollowing the November2010 meeting o the G20, one third o the

banks indicated their ability to meet the

newrequirementsin2013.Sevenbankshighlighted the areas o detail that need

urther development and implementation

by national supervisors, such as the

countercyclical buer and additional

requirements or systemically important

nancial institutions.

Although supportive o the new

regulatory ramework, the banks

generally consider that the constraintwill have a cost.

Basel 2 capital adequacy

ratios increased overall

with an average rate o

14.83% in2010

But a concern or many

banks is the disparity

o regulation aroundthe world




7/76

4 EXECUTIVE SUMMARY

Who will bear that cost?

In our view, the new rules will have an

impact on protability and return on

equity or the banks.

Change ahead

Asin2009,thependulumstillswingstowards tighter and better regulation,

shown by the swathe o guidance on

topics such as remuneration, more and

higher quality capital, diversication o

sourcesoffunding,andliquidity.Thereisa ocus on harmonisation across Europe

in these areas. Although the banks say

they welcome better regulation, they

openly acknowledge the challenges it

will bring, ranging rom sta training and

system updates, to driving how the bank

conducts its business and ensure returns

to shareholders despite increased

capital costs.

But a concern or many banks is the

disparity o regulation around the

world. Some countries are makingstrident changes to their regulation.

Other jurisdictions seem to regard the

creditcrisisof2007/2008asmoreofa

European and US issue, and are making

lessnotablechangestoregulation.This

disparity is a double-edged sword. On

the one hand it seems to provide an

opportunity or large global banks to

book their business in a less regulated

jurisdiction. On the other, a bank

continuing to book business in Europe

could be subject to various regulations,

not all o which are applied harmoniously

across the countries.

At the same time, the banks remain

under scrutiny over remuneration

policies, and the shit towards

longer term incentive schemes

continues. Ring-encing retail and

investment banking operations remains

high on the agenda. Bank levies now

aect more than hal o the surveyed

banks. Dividend policies are now moreconservative than in previous years.

It is no surprise that the chairmen and

chie executives emphasise their ocus

on core businesses, the development

o high quality relationships and the

continuation o cost eciency policies.

But the road ahead looks ar rom

certain, with urther tests on the

horizon.Theoutlookforthoseinthedriving seat looks tough.

Europeanalignment oremuneration

guidancein 2011

Ring-encing retail and

investment banking

operations remains high

on the agenda

Focus on core businesses,

the development o high

quality relationships and

the continuation o costeciency policies




8/76

5 INSIGHTS

Chairmens and CEOs statements

Highlights

2010:

A remarkable year,substantial progress,great performance

Looking ahead: Condenceof the banks in their future

success

First quarter 2011 resultsconrming the trends

In their statements to shareholders, the chairmen and CEOs

addressed various topics related to the past and coming years.

Common issues addressed included the overall perormance o

the bank during 2010 in the context o the economic and marketconditions, the role o the bank in society, compensation policy,

and some challenges o the year, notably regulatory reorms.

As or trends ahead, the main topics discussed were uture

perormance and strategies, the economic outlook and

anticipated challenges the industry has to ace in the

coming years.

Full year 2010

Overall group perormanceThechairmansandchiefexecutiveocers statements are a useul

summary o the banks perspective

on the year. Every bank in the sample

presented a chairmans report highlighting

the results and challenges o the year.

Eight banks complemented these

statements with ones by their chie

executive ocers (CEO). In two cases

(UBS and BNP Paribas) the chairman

and CEO jointly prepared one letter to

shareholders. Meanwhile, Barclays, RBS

and Standard Chartered presented a

detailed report rom the chairman o the

Audit Committee in their annual report or

thersttime.Thisisatrendweexpecttosee develop in uture.

For all the banks 2010 was a successul

yearcomparedto2009,forwhichtheresults were viewed more as a return to

protability or a year o progress. Overall

perormance was characterised by the

chairmen as substantial improvement,

substantial progress, a good year,

a successul year, a much improved

balance o prots in 2010, a remarkable

year, a crucial year, an important

milestone, a time o progress and

renewal, the groups nancial rebound

or a great perormance. A summary o

the key drivers o the 2010 results was

generallyprovided.Themainreasonsgiven were an improvement in income

in some activities, coupled with the

decrease o risks and costs through, or

example, synergies in the businesses.

Thechairmengenerallycommentedonincreased protability in their core credit

businesses such as retail and commercial

banking as economic conditions

improved, despite lower interest rates

tending to tighten interest margins. For

those banks more active in Asia and/

or Latin America such as HSBC and

Deutsche Bank there were also higher

revenues rom retail and commercial

banking rom those regions. Another

important driver o 2010 protability

indicated by six banks (Nordea, UBS,

Lloyds Banking Group (LBG), Barclays,

BNP Paribas and HSBC) was the

reduction o loan impairment charges.

Contribution o investment banking

activities to the results was more




9/76

6 INSIGHTS

attributed to a decrease o credit losses

or impairment charges than to an increase

in trading revenues.

Five banks (LBG, ING, UniCredit, RBS and

Commerzbank) carried out divestments

or balance sheet reduction programmes,

principally in order to reduce risk levels.

For almost all banks a prime ocus

o 2010 was reducing costs. It was

expressed in dierent terms such as

strong attention to eciency (RBS),

achievement o cost synergies and

savings (Commerzbank), discipline

over cost base (UBS), restructuring

the cost base (UniCredit) and ocus

on controlling costs (Santander).

LBG mentioned an improvement o its

underlyingcosttoincomeratioof4.5%,whereas HSBC presented a rise in its

ratioof3.2%duetohigherstaffcostsand investments related to strategic

initiativesacrossthebusiness.TheHSBCCEO talked about the need to reengineer

the business in order to remove

ineciencies.

Major events o the year, such as

acquisitions or the on-going process o

integrating new entities or our banks,

werenotedinsuccessfulterms.Thechairman o Deutsche Bank reerred

to three acquisitions: Postbank, the

commercial banking activities o ABN

AMRO and Sal. Oppenheim/BHF-BANK.

Similarly, the chairman o Commerzbank

commented on the completed integration

o Dresdner Bank and qualied this

merger as one o the biggest projects

inthehistoryofGermanbanking.Theintegration o BNP Paribas Fortis and BGL

BNP Paribas was presented as a success,

and the chairman o BBVA reerred to

theacquisitionofGarantiBankinTurkeyas a potential source o growth. INGannounced the sale o its insurance and

investment management activities by

two public oerings planned in 2011.

Capital and liquidity were two main

themes attracting comment, ahead

oftheimplementationoftheBasel3requirements, with the chairmen or CEOs

saying the capital and liquidity positions

o their banks were strengthened

in2010.ThechairmanandCEOofSocit Gnrale mentioned the strict

management o scarce resources that are

capital and liquidity. Five chairmen and

all CEOs (UBS, Barclays, BNP Paribas,

HSBC and Santander) highlighted the

riseoftheirTier1orCoreTier1capitalratio.ThechairmenofUBSandHSBCnotedtheincreaseoftheirTier1capitalratios resulted principally rom increased

prots in 2010, whereas others put their

strengthened ratios down to capital

issued or a decrease in risk weighted

assets. Following its acquisitions during

the year, the chairman o Deutsche Bank

reerred to its biggest capital increase

in the banks history to strengthen its

capital base. More conservative dividends

policy and retained earnings practices

also contributed to reinorcement o Core

Tier1capital(seechapter6oncapital).ThechairmanofBarclaysdiscussedthestress tests run by the Committee o

European Banking Supervisors (CEBS)

in2010andnotedhisrmsTier1ratiowas among the highest o the European

banks. A related issue to stress tests is

that o systemic risk, upon which the

chairman o HSBC expressed mixed

views. Other banks discussed the issue

elsewhere in their annual reports, but

not as detailed commentary in their

statements to shareholders. While the

chairman o HSBC agreed with reinorcing

supervision on so-called Systemically

Important Financial Institutions (SIFIs),

he expressed concerns over the additional

capital charge being discussed or theseinstitutions and noted the potential

unintended consequences that these

institutions may become preerred as

Reengineering the

business in order to

remove ineciencies




10/76

7 INSIGHTS

counterparties (due to their incremental

capital requirements), potentially leading

to urther concentration o the industry.

Economic context

Little detailed inormation was provided

onlastyearseconomiccontext.Theenvironment in 2010 was qualied as

complex by the chairman o BBVA or

tumultuous by Socit Gnrales.Thechallengingconditionsinwhichbanks operated in 2010, even i global

condence and stability had started

to be rebuilt, were mentioned in three

statements.ThechairmanofSantanderreerred to a very dicult economic

and nancial environment. Also,

two chairmen mentioned the global

economic recovery with continuing

dierential growth rates across nations.

ThechairmanofBarclaysmentionedaglobalGDPgrowthof5%in2010ledby emerging markets, whereas growth

in most o the developed countries was

generally below trend. Furthermore,

the chairmen o ve banks (Barclays,

Socit Gnrale, Deutsche Bank, RBS

and Santander) noted the diculties in

the Eurozone without giving any detailed

inormation. Regarding the global

economic and nancial situation, the

chairmen o Barclays and Deutsche Bank

expressed the view respectively that it

is too early to say that the nancial crisisis over or the worst is behind us but

we are not out o the woods yet.

The role o banks in society

Thethemeofthepublicroleofbankswasdiscussedinalmostallreports(13banksoutof15),whichisnotsurprisinginthecontext o recent political pressure on

the industry.

Five chairmen (LBG, Barclays, RBS,

Standard Chartered, Socit Gnrale)

recognised the major role o banks innancing the economy. For example,

among these banks our provided gures

on new lending commitments taken

in 2010 towards local and worldwide

customers (mortgage customers, SME

customers,othercompanies,etc).Theth gave inormation on the growth o

its lending activity during 2010. One bank

provided additional inormation on its

on-going commitments or 2011.

In eight statements (UBS, LBG, Barclays,

ING, HSBC, Deutsche Bank, RBS,Santander), the chairmen mentioned

the banks support or communities or

the social actions they undertake. For

instance, the chairman o Deutsche Bank

acknowledged its commitment towards

its corporate social responsibility

illustrated by the nancial support o

education, community development and

artprojects.ThechairmenofBarclaysand ING mentioned their initiatives to

demonstrate their behaviour as good or

global citizens.

Compensation policy

Conscious o the public debate

surrounding the issue, six chairmen

(Standard Chartered, RBS, UniCredit,

ING, LBG, Barclays) addressed the topic

o remuneration policies, stating notably

that they were in line with the regulatory

changes (deerrals and clawbacks or

variable remuneration, equity instruments

insteadofcash).Threechairmenreferredto their 2010 bonus pool, indicating

their variable remuneration policy is nolonger directly linked to the years results

and is more aligned with long term

shareholdersinterests.Thechairmano Barclays noted the 2010 bonus pool

was down 7% and the chairman o RBS

mentioned a 2,000 cap on immediate

cashbonuses.ThechairmanofLBGsaid the payout under our Group bonus

schemes or 2010 is a small percentage

ofoverallrevenues.TheCEOofBarclaysreerred to a new compensation policy

or senior employees, which links uture

pay-outs to the Groups core capital

position(seechapter8onremuneration).

A very dicult economic

and nancial environment

Remuneration policy

continues to attractsignicant public debate




11/76

8 INSIGHTS

Regulatory reorms

Regulatory changes were a pervading

theme. Most o the chairmen said

they support the on-going regulatory

reorms. In particular they discussed the

publication in December o the nal

Basel3rules,whichwillimposeincreased capital and liquidity

requirementsontheindustry.Theregulatory changes were viewed

as reshaping the banking industry

environment.ThechairmenofBarclaysand Nordea qualied the new business

environment as the New Normal. While

the regulatory reorms generally are seen

as creating a challenging environment,

some chairmen indicated they could

also be a source o new opportunities.

Specically regarding the new liquidity

requirementsunderBasel3,HSBCandNordea noted the continuing uncertainties

aroundthenewrules.TheCEOofNordeaalso anticipated longer maturity undingand less maturity transormation.

A rst favour o the impacts o the new

regulatory ramework was provided in

certain cases, but generally without

anyquantitativedata.ThechairmanofUBS indicated they were in the process

o analysing the impacts on the rm

o all new regulations and the eect

they may have on the protability o our

businesses.ThechairmenofHSBCand Nordea mentioned their banks are

meeting the basic capital requirementminimumthreshold.ThechairmenofSocit Gnrale and Deutsche Bank

said their banks expect to meet the new

prudential requirements in particular in

termsofcapitalin2013,andtwoothers(ING, UniCredit) plus the CEO o LBG

said they are in a relatively good position

tomeetthem.ThechairmanofSocitGnralementionedatargetcoreTier1ratioofaround8.5%atend2013.TheCEO o Nordea mentioned the negative

impact on their return on equity o the

Basel3capitalandliquidityreforms.

Looking ahead

Future perormance and strategies

Although they did not provide gures

on their uture protability, 12 banks

expressed condence in their uture

success. Expressions such as the bank

begins 2011 in a solid position, well

positioned or uture success, excellent

growth prospects and 2011 will be a

yearofimprovementwereused.Thechairman o Socit Gnrale mentioned

atargetof6billionofnetincomeby2012.ThechairmanofCommerzbankanticipates rom 2012 an operating prot

beore regulatory eects o approximately

4billionperyear.Throughoutthestatements,futurestrategies o the banks were discussed

withoutanyspecicdetails.Threegeneral priorities were dened:

i) A ocus on core businesses: some

banks stated they prioritised risk

reduction through a decrease innon-coreassets.TheCEOofRBSmentioned that he aims at building the

quality and quantity o Core prots.

ii)Thedevelopmentofhigh-qualityrelationships with customers: the

chairman o UniCredit characterised

the ocus on client relationships as

Real-LifeBanking.ThechairmanofUBS reerred to its we will not rest

campaign to ocus on clients.

iii)Thecontinuationofcosteciency policies.

Other strategic intentions were expressed

by some banks. HSBC and LBG aimed at

maintaining a prudent liquidity position.

TheCEOofHSBCmentionedthexingo a maximum advances-to-deposits ratio

fortheGroupof90%intheriskappetitestatement o the Group. Furthermore,

some chairmen mentioned the need

to strengthen their brand image or

reputation (Socit Gnrale, UBS

and UniCredit).

Longer maturity unding

and less maturity

transormation




12/76

9 INSIGHTS

Based on 2011 Q1 press releases, the

trends announced by the chairmen

seem to be conrmed. Globally the

banks o the sample perormed well,

comparing avourably to the results o

the rst quarter o 2010. Core businesses

continued to generate growth and

disposals o non-core assets seem

to continue, with impairment charges

remaining at low levels.

Economic outlook

Only a ew chairmen gave their view o

the economic outlook. Some provided

inormation on orecast growth in

certain economic zones, whereas others

commented on nancial markets.

ThechairmanofBarclaysmentioned

globalgrowthdownaround4.25%in2011 due to less rapid growth in Asia and

Latin America, where monetary policy has

begun to tighten due to higher infation.In the chairmans statement rom Socit

Gnrale, growth disparities in developed

countries were announced. A orecast o

1.5%growthintheEurozoneandnearly

2.5%growthfortheUSeconomywasprovided.Theresurgenceofsovereignrisks at the beginning o the year and

the preoccupying situation in the Middle

East and North Arica aecting the price

o oil and condence was noted by the

chairmen o Barclays and the CEO o

HSBC. Both expect a positive resolutionto the situation in the Middle East and

North Arica.

HSBCs CEO and Socit Gnrale

reerenced the cyclical volatility or

erratic movements in the nancial

marketsin2011.Twootherchairmen(RBS and Santander) expected a rise in

interest rates during 2011. Conversely,

the CEO o HSBC commented that

low interest rates in many developed

countries will continue at least in the

near-term.

Shareholder value

Delivering long-term shareholders

value was among the main concerns

ofthechairmenandCEOs.TheCEOofHSBC targeted uture returns on average

shareholdersequityof12%to15%.Similarly, the CEO o Barclays stated

that the bank must be in position to

deliveratleasta13%returnonequity.At this stage there continues to be a widerangeofdividendpolicies.Thechairmeno ve banks (BNP Paribas, Socit

Gnrale, HSBC, Standard Chartered,

Deutsche Bank) recommended the

paymentofacashdividend.Threeotherchairmen (UBS, Barclays, and ING)

indicated they wanted to maintain a

conservative dividend policy, notably

due to coming regulatory reorms.

Delivering long-term

shareholders value




13/76

10 INSIGHTS

Rebuilding trust and confdence

Following years o nancial and economic

crisis, seven chairmen (LBG, Barclays,

ING, HSBC, Nordea, RBS, UniCredit)

recognised there is still a need to rebuild

the trust and condence o stakeholders

(customers, employees, shareholders,

etc). In the words o LBGs chairman: we

have much work to do as an industry to

rebuild trust and understanding.

Even i messages o optimism are

dominant in the statements, particularly in

relation to results and protability, there is

a cautious and prudent atmosphere given

the economic and regulatory uncertainties

the banks are acing.

Therstquarterresultsof2011seemtoconrm the trends o 2010 and expected

neartermsuccess.TheCEOofBarclaysdeclared that the bank has made a good

start in 2011 in a challenging external

environment and making good progress

on execution in line with strategic

priorities.Thiswasmirroredbythesentiments expressed by the chairman

o Commerzbank, who said the bank

has got o to a great start in 2011.Meanwhile, the CEO o Nordea reerred

to a strong quarter and the CEO o

BNP Paribas to a very good

perormance and strong prot-

generation capacity across all the

operating divisions.

Group net income (ME) 1st Quarter 2011 4th Quarter 2010 1st Quarter 2010

HSBC 3,040 2,574 2,122

BNP Paribas 2,616 1,550 2,283Santander 2,108 2,101 2,215

Deutsche Bank 2,062 601 1,762

UBS 1,405 1,293 1,712

ING 1,381 130 1,230

Barclays 1,186 NP 1,250

BBVA 1,150 939 1,240

Commerzbank 985 257 708

Socit Gnrale 916 874 1,063

UniCredit 810 321 520

Nordea 742 770 643RBS - 619 14 - 291

LBG - 2,858 - 2,177 198

Total 14,925 9,247 16,656

Note:Pressreleases/interimmanagementstatementsrelatedtoresultsasatMarch31,2011NP: not published

DatanotavailableasofMarch31,2011forStandardChartered.Exchangeratesusedasat31March2011forallquarters.Source: KPMG International, July 2011

Strong prot-generation

capacity across all the

operating divisions

Banks welcomed

successul

Q1 2011




14/76

11 PERFORMANCE

Overall perormance with ocuson investment banking

Highlights

Decreased loan impairmentcharges

Stable asset volumes

Difcult environment for

investment banking

Global economic recovery continued during 2010. However, the

levelofeconomicactivityremainedpoor.Twothirdsofglobal

GDP growth was attributable to emerging economies, especially

Asia and Arica, while growth in the West remained ragile.

Signicant decreases in loan impairment charges were reported

by all banks, which seemed to oset the eect o reduced

revenues, particularly in the investment banking space.

Overall group perormance

Income statement

Key drivers to the improved bottom lines

reported by banks during 2010 refected

in the graph opposite were identied as

signicantly lower impairment losses

on loans and strong perormance romemerging market activities. Somewhat

higher derivative air values were also

reported due to restored condence and

improved trading volumes, especially

in the second hal o 2010. Focusing on

strengthening client relationships and

divesting non-core activities remained

key trends during the year. All banks

reported increases in their prot beore

tax gures, other than Deutsche Bank,

UniCredit and LBG. Deutsche Bank

ascribed the decrease to the one-time

charges relating to IFRS accountingimplications to its three acquisitions

o Postbank, parts o ABN AMRO and

Sal. Oppenheim/BHF-BANK during the

year. LBGs decrease in prot beore tax

was attributed to the gain on acquisition

ofHBOSincludedinits2009results,while UniCredits decrease resulted rom

impairment o goodwill and recognition o

deerred taxes.

Thelargestincreasesinprotswere reported by HSBC, Socit

Gnrale, BNP Paribas, ING, UBS andCommerzbank, with the latter three

making a comeback to protability ater

reportinglossesduring2008and2009.

ING attributed the improvement to

exceptional perormance in its banking

operations, which more than oset losses

suered in its insurance operations. It

also reaped the benet o divesting anumber o non-core activities over the

past two years, which generated net

gains on sales during the current year and

o-set some one-o expenses, such as

goodwill write-downs in the Insurance

reporting unit in the United States,

write-downs o deerred acquisition

costs, and expenses relating to various

restructuring programmes.

UBS attributed its enhanced protability

primarily to signicant improvements

in income rom trading businesses,

especially the investment banks xed

income, currencies and commodities

revenues,coupledwithanalmost66%reduction in its credit loss expenses,

slightly lower operational expenses due

to lower net restructuring costs included

in the current year, a signicantly larger

valuation gain recorded on an option to

acquire SNB StabFunds equity,

and reported gains on sales o

some operations.

Commerzbank also reported improved net

trading income, supported by much more

avourable nancial market conditions,

Successul year,

Good perormance,

Recovering economicenvironment




15/76

12 PERFORMANCE

Overall performance - Profit before tax (Million )

0

15,000

12,000

9,000

6,000

3,000

-3,000

2009

2010

-6,000HSBC BNP Santander Barclays BBVA UBS Socit Standard ING Deutsche Nordea UniCredit Commerz- LBG RBS

Paribas Gnrale Chartered Bank bank

Source: KPMG International, July 2011

substantially lower loan loss provisions and

the elimination o special charges reported

in the prior year, connected largely with the

integration o Dresdner Bank.

HSBCs protability was also attributed to

a signicant decrease in loan impairment

charges and an increased share o

associates prots driven by the strong

results in Asia.

BNP Paribas attributed its successul year

to the improved economic environment

and successul merger o the BNP Paribas

Fortis and BGL BNP Paribas entities,

wheresynergieswere30%inexcessoftheoriginalestimate(900million)withmarginally higher restructuring costs.

Socit Gnrale reerred to its

geographically-diverse international retail

banking operations, record perormance

by its insurance operations and growth

in vehicle leasing, coupled with

improvement in the perormance o

its legacy assets.

Balance sheet

2010 witnessed rail increases in

assets overall. Many o the banks

continued their strategies o divesting

non-core and legacy assets, while

others searched or opportunities

presentedbyemergingmarkets.Theyear was marked by continued market

and regulatory uncertainty, with banks

choosing to ollow more conservative

policies: ocusing on maintaining

existing asset balances and

strengthening liquidity.

Thesearchforoptimumreturnonassets continued to preoccupy

key decision makers within banks.

Scarceness o capital made it more

costly and, with existing uncertainty

around the nality in regulatory reorms,

banks have been trying to dispose o

lower earning, lower quality assets and

replacing them with better quality ones.

Were balance sheet

reductions in 2010 to

reduce risk...

...or just to shrink the

balance sheets to matchavailable capital?




16/76

13 PERFORMANCE

Total assets (Million )

0

2,500,000

2,000,000

1,500,000

1,000,000

500,000

2010

2009

BNP Deutsche HSBC Barclays RBS ING Santander LBG Socit UBS UniCredit Commerz- Nordea BBVA Standard

Paribas Bank Gnrale bank Chartered


Deutsche Bank, Santander, Socit

Gnrale, Barclays and, to a lesser

extent, HSBC, ING, BBVA, Nordea and

Standard Chartered reported increases in

totalassets.Theremainderofthebanksreported decreases.

ThelargestassetincreaseswereatDeutscheBank(27%),Barclays(8%)and Socit Gnrale (11%). Deutsche

Bank attributed its large asset increase to

acquisitions during the year, particularly

Postbank, which contributed a signicant

increaseinitsloanbook.Theremaindero the asset increase was a result ooreign exchange dierences, particularly

between the US dollar and Euro, which

represented about 20% o the total asset

increase. Positive market values rom

derivatives, which ell substantially in the

prior year, urther contributed to the nal

increased asset balances.

Socit Gnrale attributed the increase

to its strategy o growing its customer

base in Europe, including some

targeted acquisitions during the year,

such as Socit Marseillaise de Crdit,

Metropolitan West Asset Management

and increasing its share in Rosbank.

Barclays similarly has increased trading

portolio assets, seen derivative air

values improve and increased loans to

customers, in part thanks to its

acquisition o Standard Lie Bank.

Thesmallerincreasesinassetsreportedby other banks were predominantly

attributed to improved derivative

asset values and increased lending to

customers, with a varying mix between

commercial and retail lending.

By contrast, BNP Paribas, RBS, LBG,

UBS and Commerzbank reported total

assetdecreases.Theywereprimarilyattributed to divestments, with a

realigning o operations and ocus on

their core businesses, as in the case

o RBS, LBG and Commerzbank. For

Commerzbank, RBS and LBG, total asset

reduction was part o risk reduction

measures undertaken to restructure their

balance sheets and reduce risk.

BNP Paribas explained its reduction in

total assets by various decreases in loans

and receivables, oset by increases in

the air value o various nancial assets.

Meanwhile, UBS described its assets

movement as the eects o unavourable

Marginalincrease intotal assetsfor8ofthe15banks 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary o KPMG Europe LLP and a member rm o the KPMG network o independent member rms aliated with KPMG International Cooperative, a Swiss entity.



17/76


18/76

15 PERFORMANCE

interest rate business also contributing

signicantly to revenues. In addition,

M&A reported considerable progress,

while the acquisition o parts o ABN

AMRO in the Netherlands has provided

Deutsche Bank with a signicant number

o new clients.

Barclaysreporteda25%decreaseintop-line income rom the exceptional

performanceenjoyedin2009.Thiswaspredominantlyattributedtothe35%decrease in trading income rom xed

income, currency and commodities

products, due to lower contribution rom

rates and commodities, and subdued

market activity in European equity

derivatives.Thefallwaspartiallyoffsetby an increase in ee and commission

income, with higher contributions rom

the Asian markets.

HSBC also reported a decrease in net

operating income (beore the eects o

impairmentcharges)of9%,mainlydueto lower net interest income rom the

maturing o higher yielding investments,

low interest rates and fattening yield

curves. Lower trading income was also

attributed to uncertainty in the Eurozone.

BNP Paribas reported an 11% decline in

investment banking revenues rom the

prioryear.Thiswasduetoasignicantdecrease in xed income revenue,

stemming rom uncertainties rom

sovereign debt risks in some European

countries. However, it was oset by an

improvement in advisory and nancing

incomes.

Thebanksthatexperiencedthehighestgrowth rate in revenues during the year

are (in descending order):

1. Commerzbank

2.UBS3.SocitGnrale4.DeutscheBank

Commerzbank and UBS attributed

their growth in revenues to increased

transaction volumes and decreased

impairment charges.

RBS showed a signicant decrease

in revenues rom investment banking

operations, attributed to increased risk

aversion in the market during the second

hal o 2010.

Market risk

Themeasurementandmonitoringofmarket risk associated with trading

activities continued to be an area o

increased interest or banks. In addition,

disclosures relating to market risk

exposures, objectives, policies and

processes or managing market risk, and

methods used to measure the risk are

compulsory in accordance with IFRS 7

Financial Instruments: Disclosures.Market risk is the potential or loss

o uture cash fows or unavourable

changes in air values o nancial

instruments due to adverse changes

inmarketratesorprices.Theprimarycategories o market risk identied by

all banks as impacting on their business

activities are interest rate risk, oreign

exchange risk and price risk associated

mainly with commodity and equity prices.

Value at Risk (VaR)

VaR is a technique used to estimate the

probability o portolio losses arising rom

uture potential adverse movements

in market rates, prices and volatilities,

based on the statistical analysis o

recent historical market price trends and

variances. It is a measure o how much

money the bank can lose in one day i

some market variables were to change.

Theprocessinvolvestherevaluationofexisting positions, by taking into account

the eects o historically observed market

riskfactorsonthecurrentportfolio.Thusevents that have happened in the past,

such as interest rate increase/decrease

Signicant decrease in

impairment reported

by all banks

Thebankswiththetoprevenuesgenerated rom investment banking

activities ater write-downs are

(in order o magnitude):

1.DeutscheBank20.4billion(2009:Barclays20.8billion)

2.Barclays15.5billion(2009:DeutscheBank18.8billion)

3.HSBC13.8billion(2009:HSBC16.5billion)

4.BNPParibas11.7billion(2009:

BNP

Paribas

13.5

billion)




19/76

16 PERFORMANCE

1 Day Trading VaR as disclosed (Million )

164.

6

212.

35

95.

9

60.

5

250 2010

80.9

2009

114.

1

200

70.

9

121

150

60.9

7

71.7

6100

56.

04

64.

25

50

54.5

5

43.3

2

0

42

RBS Commerz Nordea Deutsche HSBC Barclays UBS BNP Socit UniCredit Santander BBVA ING Standard LBG

63

-bank Bank Paribas Gnrale Chartered

99% 99% 99% 99% 95% 95% 99% 99% 99% 99% 99% 99% 97.5% 95%

41.

7

30.

4

35.

5

39.

9

29.

6

27.

5

28

31

19

27

7.

24

9.

96

7.

24

14.

59

Source: KPMG International, July 2011Note:Spot1DayVaRwasusedasat31December2010,exceptforSocitGnralewhereaverageVaRwasavailablefromtheannual report. Deutsche Bank has excluded Postbank rom its 1 Day trading VaR. For Nordea, total VaR has been used as

trading VaR was not disclosed separately.

1 Day Trading VaR as a % of trading revenue (Percentage)

20092010

0

1

2

3

4

5

20

30

RBS Commerz Nordea Deutsche HSBC Barclays UBS BNP Socit SantanderUniCredit BBVA Standard LBG-bank Bank Paribas Gnrale Chartered

99% 99% 99% 99% 95% 95% 99% 99% 99% 99% 99% 97.5% 95%Source: KPMG International, July 2011Note: Nordea VaR refects total VaR as trading VaR was not shown separately.




20/76

17 PERFORMANCE

o x%, are applied to the current portolio

o the bank to calculate a potential loss.

Back testing is usually perormed in order

to assess the reliability and accuracy o

the VaR model outcome, by comparing

the VaR estimate to the actual losses

incurred.Thehigherthecondence

level used in the model, the higher the

VaR number and there will be ewer

instances o outliers, i.e. when the actualresults are not close to the estimates.

TheBaselCommitteeonBanking

Supervision proposes that institutions use

acondencelevelof99%,whichwouldimply that only two to three breaches o

the VaR estimate should take place during

the year.

Interpreting VaR

VaR output is a single number

representing an estimate o the maximum

expected loss o a portolio over the

holding period (usually set at one day)at a given condence level. In practice,

VaR cannot be used or comparison

between banks, as banks use alternative

estimates and assumptions in their

models. For example, the use o dierent

condence levels can either increase or

decrease the VaR number, with all other

inputs being the same. In addition, it can

reasonably be expected that a bank with

a higher VaR number would have bigger

trading operations, should all the banks

risk appetites be within a similar range.

VaR can be used to assess the banks

risk year-on-year and also to assess the

potential portolio loss, but only when

looked at against the banks trading

operations size. In other words, a more

comparable view or market risk between

the banks could be a ratio o the VaR

number to trading revenue.

All banks used a one-day holding period.

A99%condencelevelwasusedbythe majority o banks, except or LBG,

Barclaysand

UBS,

which

used

a95%

condence level, and Standard Chartered

whichuseda97.5%level.Thehistoricalobservation period applied in the VaR

methods varied amongst the banks

betweenoneandtwoyears.Thisimpliesthat market trends having occurred in the

last one to two years are used as inputs

to estimate uture portolio outcomes.

UBS was the only bank to use a dierent

historical observation period (o ve

years), that implies higher volatility data

was included in UBS calculation.

Most banks disclosed lower dailytradingVaRresultscomparedto2009,predominantly driven by reduced volatility

across various asset classes, reduced

exposures due to lower client activity

and rolling o o highly volatile historical

data points. However, Socit Gnrale,

UBS and Commerzbank reported

slight increases in daily trading VaR.

Rationalisation or the increase was,

respectively, exposure to the Eurozone,

which refected the risk o debt struggles

in peripheral European countries,execution o growth plans in investment

banking operations, and change to its

internal market risk model.

Theratiocalculatedinthegraphonpage16wascalculatedinordertocreatea more comparable picture o market

risk between the banks. We took the

trading VaR disclosed by all banks as a

percentage o their investment banking

revenue, ater write-downs, to arrive

at a potential percentage loss. For the

majority o banks, the potential loss romtrading activities seems to be around less

than 1% o trading income.

VaR limitations

Despite its wide application, the VaR

model has a number o shortcomings.

Theseshouldbeconsideredwhenrelyingsolely on the VaR output to assess and

analyse market risk.

Theuseofpastmarkettrendstopredictthe uture in VaR methodology implies

the past would repeat itsel, which does

not always hold true.

Allpastmarkettrendsareequallyweighted.

One-day holding period

assumes assets can

be liquidated within

one day...

...yet three days required

or a recent liquidation o

a signicant position...

...is one-day VaR useul?




21/76

18 PERFORMANCE

Fair value hierarchy of financial assets (Percent)

0

1 1 2 2 3 3 1 1 2 2 4 2 5 4 3 3 2 2 4 5 3 3 2 2 4 5 2 2 4 6100

80

60

40

20

41

5866

33 40

58 60

38 46

5148

49 4944 54 54 62 64 56 59

61 62 62 6271

67 71 7181 80 84 79 80 87 84 82

50 5544 44

34 34 3936 36 35 36 36

25 28 26 2617 18

12 16 1811 12 12

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

BBVA ING LBG Santander HSBCLevel 1 Level 2 Level 3

Socit UniCredit BNP Standard UBS Nordea RBS Barclays Commerz- DeutscheGnrale Paribas Chartered bank Bank


Theone-dayholdingperiodassumesassets can be liquidated within one day,

which is not always the case.

Fair value implications

As part o IFRS 7 Financial Instruments:

Disclosure, all banks are required to

disclose air value measurement basis,

the air value hierarchy level or allnancial instruments measured at air

value on the balance sheet, and details o

signicant transers between levels o the

hierarchy.

Thethreelevelstothehierarchy,as

identied by IFRS 7, are:

Level1: air value o the nancialinstrument refects unadjusted quoted

prices or identical instruments in active

markets.

Level2: air value is determined byusing inputs, other than quoted prices

that are observable or the nancial

instrument, either directly or indirectly.

Level3: air value is determined byusing inputs or the nancial

instrument that are not based on

observable market data, i.e. it is

based on unobservable inputs.

Therelativeproportionoftotalnancialassets and nancial liabilities measured

at air value is a good indicator o each

banks trading activities. A higher

proportionofLevel3instrumentscouldurther indicate the banks involvement

in exotic instruments, where market

prices are not available. While a general

trend o decrease in nancial assets and

nancial liabilities held at air value was

noted, refecting the general decrease

in exposures either through divesting or

just general decrease in the air values

o the portolios, trading books have not

diminished signicantly.

Derivative assets represented, on

average, around a third o the trading

portfolioassets.Thiscontrastswiththe

Rolling o o highly volatile

historical data points

resulted in most banks

disclosing lower daily

trading VaR resultscomparedto2009




22/76

19 PERFORMANCE

Fair value hierarchy of financial liabilities (Percent)

5 4 2 2 1 1 5 5 0 0 3 2 0 0 1 0 2 3 2 2 4 5 1 1 1 1 6 9 0 0100

80

60

40

20

0 3 3 1

6870

7573 79

8178 79 88 85 87 86 89

90 88 90 91 88 92 90 88 88 93 94 90 92 91 8899 99

27 26 231620 18 17

2512 15

10 11 10 11 10127 9 6 568 7

19

78

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

ING HSBC Nordea BNP BBVA UniCredit Santander Standard Deutsche Barclays UBS RBS Commerz- Socit LBG Paribas Chartered Bank bank Gnrale

Level 1 Level 2 Level 3Source: KPMG International, July 2011

previous year, where derivative assets

werehalfoftradingassets.Thisdeclinecomes despite an increase in derivative

air values, refecting a drop in derivative

assets volumes held by the banks due to

plannedexposurereductions.Thelargestrepresentations are still being seen by

Barclays(60%oftotaltradingportfoliorepresented by derivative assets),

DeutscheBank(57%)andRBS(54%).Derivative liabilities, on average, refect

just over hal the trading portolio

liabilities, with the highest proportions

seen at Barclays, Deutsche Bank, RBS

and Standard Chartered.

Consistent with previous years, the

proportionofLevel1,2and3nancialassets and liabilities varies between the

banks. However, the most requently

used categories are Level 1 and 2.

Comparison between the banks is

dicult as a result o the high degree o

subjectivity involved in determining the

split between the three categories and

how these are applied in practice. Many

o the banks have tried to acilitate better

understanding by including examples o

nancial instruments that would typically

be classied in a given category.

Financial assets

Itcanbeseenfromthegraphonpage18that Level 1 and 2 categories represent

onaverageapproximately98%oftotalair value nancial assets.

UniCredit has the highest percentage oitsnancialassetsinLevel3,standingat5%,whileDeutscheBank,BarclaysandUBS are ollowing very closely, each with

4%oftotalnancialassetsheldatfairvalue.Thesemainlyincludecollateraliseddebt obligations, collateralised loan

obligations, various bonds trading in

illiquid markets and highly customised

CDOderivatives.Thiscouldindicatetheexistence o Day 1 P&L reserve, less

certainty around balance sheet valuations

and on-going prot and loss impacts.

Thebankswiththehighestpercentageo assets held at air value, as part o total

assets, are:

1.DeutscheBank(61%)2.RBS(54%)3.UBSandBNPParibas(eachwith53%)




23/76

20 PERFORMANCE

Day 1 P&L reserve released to profit or loss (Million )

700

600

500

400

300

200

100

0

Deutsche Socit BNP HSBC

Bank Gnrale Paribas

2009

2010

2 33

96

8 1216

112

21

79115

29

209

161

216

111

377

430389

673

495

361

UBS RBS Barclays Nordea Commerz- UniCredit Standard

bank Chartered


Financial liabilitiesConsistent with nancial asset ndings,

the largest category in the nancial

liabilities held at air value is Level 2, as

shown by the graph opposite.

Thebankswiththehighestcompositiono nancial liabilities in the Level 1

category are the leaders rom the

previousyear:INGwith27%(2009:26%)andHSBCwith23%(2009:25%)oftheirnancial liabilities being measured using

quotedprices.Thisindicatesimmediaterecognition in the prot or loss o changes

in own credit risk.

Day 1 P&L

An implication o having nancial assets

and liabilities categorised into the air

value hierarchy is that o the Day 1 prot

and loss eect. For example, i a nancial

instrument is purchased or a certain price

but the bank uses a model to calculate

the instruments value on the purchase

date, there could be a dierence between

the price paid or that instrument and the

value calculated using that model. I the

model used to calculate the instruments

value applies unobservable inputs,

then the dierence between the price

paid or the instrument and the model

value cannot be taken to prot and loss

immediately. In accordance with IAS

39FinancialInstruments:Recognitionand Measurement, this dierence is

released to prot and loss over the lie

o the instrument, when inputs become

observable or when the instrument is

sold.Thiscouldpotentiallycausevolatility in the prot or loss depending

on the amount o that dierencedeerred over time.

Disclosures recommended by IFRS 7

Financial Instruments: Disclosures

relating to the Day 1 P&L incorporate

issues such as accounting policies,

reconciliation o the reserve held at

year-end with movements during the

year, and transers to prot and loss

during the year.

All banks have included some

disclosure around Day 1 P&L,

except LBG, BBVA and ING.

Thebankswiththehighestpercentageo liabilities held at air value are:

1.RBS(47%)2.DeutscheBank(46%)3.UBS(45%)4.Barclays(40%)

Overall, Day 1 P&L

releases not as signicantas in prior years




24/76

21 PERFORMANCE

Day 1 P&L reserve on balance sheet (Million )

2009

2010

0

200

400

600

800

1,000

2 32 1642 44

160116

148 145

189 196195238

453481

622

822796

823

920

860

BNP

Paribas

Socit

Gnrale

Deutsche

Bank

UBS RBS HSBC UniCredit Barclays Nordea Commerz-

bank

Standard

Chartered


Day 1 P&L release as a % of PBT (Percent)

-15

0

5

10

15

20

80

100 20102009

12.5

6.9 6.6

84

2.9

-7.8

3.5

4.8

2.11.5 0.6 0.4

3.6

0.31.5

0.2

3.3

00.1

-1-0.3

-25

Deutsche

Bank

Socit

Gnrale

UBS BNP

Paribas

HSBC Commerz

bank

Nordea Barclays UniCredit Standard

Chartered

RBS

-25





25/76

22 PERFORMANCE

BNP Paribas and Socit Gnrale

held the highest Day 1 P&L reserve at

year-end. Overall, it seems the reserve

balances have not increased signicantlyrom the year beore, which implies that

signicant uture prot volatility might not

be expected.

Thehighestreleaseofthisreserveto prot and loss or the year was by

Deutsche Bank, ollowed by Socit

Gnrale and BNP Paribas. In terms o

volatility prot or loss, the graph opposite

shows the percentage release to total

prot beore tax. It is evident that this

release has not aected prot or loss

signicantlyin2010.Thismaybedueto the act Day 1 P&L tends to accreteevenly into prot and loss, thereore it is

generally less volatile than other air

value movements.

Fair value gains on own credit

Theinterestingfactaboutfairvaluechanges on own liabilities is that should

a banks credit rating deteriorate, the air

value o its liabilities decreases, which

results in a gain taken to prot and loss.

A corresponding loss will be generated

should the banks credit rating improve.Thiswillhavealargereffectonbanksthat hold a larger portion o their

liabilities at air value.

Thebiggestgainsexperiencedduring2010, and thus decreases in their credit

spreads, were by Nordea, Barclays

and RBS, while the biggest losses and

thus increases in credit spreads were

experienced by BNP Paribas, Socit

GnraleandUBS.Thiscausesvolatilityover the years in the nancial statements,

as refected in the graph below, and hasalwaysbeencounterintuitive.IFRS9removes this accounting treatment or

nancial liabilities held under the air value

option,witheffectfrom1January2013.Such debt will be held either at amortised

cost or at air value, with changes in

own credit risk being recognised in other

comprehensive income and not prot

and loss.

Fair value gains/losses on own credit (Million )

0

2009 20082010

5,000

4,000

3,000

2,000

1,000

-1,000

-2,000

-3,000

-4,000

652445

1,708

203

1,438

43349

28230

13 37 4

4,661

142

2,683

441734

-51

-512

-2,074

-166 -264 -191-8 -46 -89 -176

-347

-1,444

-427-720

-457 -362

-5,000 -4,744

Nordea Barclays RBS Deutsche ING LBG Standard HSBC Commerz- UBS Socit BNP

Bank Chartered bank Gnrale Paribas





26/76

23 PERFORMANCE

Derivative assests (Million )

0

Deutsche RBS Barclays BNP UBS Socit HSBC Commerz- Nordea UniCredit Santander LBG ING BBVA Standard

100,000

200,000

300,000

400,000

500,000

600,000

700,000 2010

2009

Bank Paribas Gnrale bank Chartered


Derivatives

In accordance with IFRS, derivativecontracts are refected at air value on

the balance sheet, with movements in

the air value being taken to prot or

loss. Derivative values, as seen rom

the balance sheets, give only a broad

indication o the risk exposure o the

bank, since a derivatives air value moves

in line with an underlying asset or liability

or other market variable, and it is urther

exposed to risks such as counterparty

credit risk and wrong way risk.

Thesecontractsarepredominantlyheld

as part o the banks trading portolios or

purposes o client acilitation, arbitrage

and/orspeculation.Thesizeofthederivative portolio is oten indicative

o the banks business model and

investment ocus.

Consistent with previous years, derivative

assets largely oset derivative liabilities,

as seen rom the graph opposite, and

very small net eects can be noted.

Incontrastto2009,whichwastheyearo drastic derivative asset decline across

the banks, 2010 saw modest increases in

derivative market values.

All banks reported an increase inderivative air values over the past year,

with the exception o Commerzbank, BNP

Paribas, UBS and RBS. Commerzbank

attributed its decrease to expansion

in netting, where more derivative

assets and liabilities were allowed

to be netted o against each other.

Overall small decreases are attributed

to oreign currency movements and

lower transaction volumes. A general

improvement was seen in interest

rate and oreign exchange derivatives,

due to movements in orward interest

rate curves and volatility in the oreign

exchangemarket.Thisimprovementwas partially oset by the decline in

values o equity, credit and commodities

derivatives as a result o reduced

volatility.Thelargestincreasewasnotedon Deutsche Banks balance sheet,

which was attributed equally to currency

translation eects and acquisitions.

Consistent with the previous year, the

largest derivative asset balances were

held by Deutsche Bank, RBS, Barclays,

BNP Paribas and UBS, each with over

300billionasatDecember2010.

2010 saw modest

increases in derivative

market values compared

to2009,whichwastheyear o drastic derivative

asset decline across

the banks




27/76

24 PERFORMANCE

Gross derivative positions as at 31 December 2010 (Million )

0 +/-100,000 +/-200,000 +/-300,000 +/-400,000 +/-500,000 +/-600,000 +/-700,000

Deutsche Bank

RBS

Barclays

BNP Paribas

UBS

Socit Gnrale

HSBC

Commerzbank

Nordea

UniCredit

Santander

LBG

ING

BBVA

Standard Chartered

-10,609

-3,631

-17,281

+749

-5,923

+5,536

-1,579

+10,760

-938

+2,253

+2,210

-10,062

+5,435

-2,398

-548

+

-

+

-

+

-

+

-

+

-

+

-

+

-

+

-

+

-

+

-

+

-

+

-

+

-

+

-

+

-

+ Net position

- Net position

Derivative assets gross

Derivative liabilities gross


Outlook

2010 showed a mild economic

improvement ater the nancial

crisis, and even though there

were clear signs o recovery, bank

leaders were unanimous that the

global economy remains ragile.

Investment banking perormance,

which makes up a signicant

portion o overall banking

perormance, could not live up to

the record revenues witnessed

in2009.Thesizeoftheasset

portolio does not directly translate

to revenue generating capabilities

anymore, and with the proposed

conservative new regulatory

reorms relating to capital, banks

have become selective with

regards to what assets they

would like to keep on their balance

sheets.Thiswasevidentfromthe

continued divestment o non-core

operations, and by selling lower

earning and lower quality assets

and replacing them with assets

o higher quality and perceived

lowerrisk.That,ofcourse,has

not been easy, as many banks

blamed low interest rates and

fattening yield curves or the lower

returns, especially with many

maturing investments having had

to be re-invested at lower yields.

Without doubt, the uture will be

interesting, although not easy or

the banks.




28/76

25 IMPAIRMENTS

Analysis o allowances and write-os

Highlights

Increased maximum credit

risk exposure

Lower charges for loanimpairment

On the horizon: provisionfor expected losses

Asexpectedandannouncedin2009,impairmentchargeson loans and advances ell signicantly. It refects improving

credit conditions in the main sectors and geographies in which

European banks lend, which led to lower charges across themajority o businesses.

However, many o the banks moderate this assessment since

some national markets are still in crisis.

Maximum credit risk exposure

All banks provided inormation, including

their maximum credit risk exposure as

required under IFRS 7. Commerzbank

disclosed maximum credit risk exposure

net o collateral, probabilities o deault

andeconomicfactors.Forthe14otherbanks, the collateral held to reduce the

exposures is not taken into account in the

disclosed maximum credit risk exposure.

Themaximumexposuretocreditriskrelates to balance sheet and o-balance

sheet nancial instruments, incorporating

the gross carrying amount o nancial

assets including derivatives, the total

amount o committed acilities and the

maximum amounts guaranteed.

In general, the maximum credit risk

exposure increased slightly compared

to2009.DeutscheBankexplainsthatthe increase in credit risk exposures was

driven by acquisitions (mainly Postbank),

which led to a rise in deposits with banks,

nancial assets at air value through prot

and loss, and loans. Similarly, Standard

Chartereds increased credit risk exposure

resulted mainly rom the rise o exposure

to loans and advances to banks and

customers due to growth in the mortgage

portolio and broad-based growth across

several industry sectors in Wholesale

Banking. HSBC reported an increase in

loans and advances to customers, which

was driven by ocussed growth in Asia

in commercial lending and in mortgage

lending within Hong Kong and the UK.

Contribution o o-balance sheet items

to the maximum credit risk exposure

varied signicantly rom one bank to

another,rangingfrom28.1%(RBS)to10.5%(LBG).Themajorityofbanksdisclosedthis inormation in the notes to the

nancial statements, with ve bankspresenting the disclosures in the risk

management report.

In general, the maximum

credit risk exposure

increased slightly

comparedto2009

All banks had

signicant o-balancesheet exposures




29/76

26 IMPAIRMENTS

Maximum credit exposure (Million )

0

500,000

1,000,000

1,500,000

2,000,000

2,500,00022.1%

21.6% 19.8% 18%15.7%

15.9%

14.9%18.7% 10.8%10.9% 20.1%

19.9%28.1%

29.1% 27.3%27.5%

10.5%10.7%

20.1%20.2%13.5%

13.4% 15.3%17.3%15.8% 16.5%

HSBC BNP Barclays Deutsche Santander ING Socit RBS UniCredit LBG BBVA Nordea Standard UBSParibas Bank Gnrale Chartered

Off-balance sheet 100% (%) Off-balance sheet/total credit risk exposureBalance sheet Off-balance sheet exposure

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

is not distinctly identified

Source: KPMG International, July 2011Note: Commerzbank is not presented because it discloses maximum credit risk exposure net o collaterals,

probabilities o deault and economic actors thereore, it is not comparable.

Impairment charges

Theimpairmentchargefortheyear,which comprises the net impairment

allowance (ater releases) or credit

risk on loans to customers and banks,

decreased or most banks in 2010.

Impairmentchargesdecreasedby29%on average across the survey with the

totalchargebeing80billioncomparedto113billionin2009.Thechargewasreducedatleastby30%forHSBC,BNP Paribas, Deutsche Bank, Nordea,

Standard Chartered, ING and UBS.

Only Santander recorded a rise o the

impairmentchargecomparedto2009duenotably to increased bad loans in Spain

and Portugal, the acquisition o Santander

Consumer Finance and a change in local

regulations relating to provisions or

loan losses.

Thedecrease

in

impairment

charges

resulted rom dierent actors such as:

Improved economic conditions inthe USA and UK: Loan impairment

charges or HSBC were reduced in all

regions and all customer groups but

particularlyintheUS(-7,711million),driven primarily by HSBC Finance and

declining impairment charges in retail

and commercial portolios in the UK,

where economic conditions improvedand interest rates remained at

low levels.

ING(-1,248million)experiencedimproving portolio within commercial

banking (mainly in the USA), even i

it was partly oset by the continuing

elevated levels o risk costs in retail in

Benelux, since the economic recovery

in the Netherlands remains ragile.

ForBNPParibas,thechargeforloan impairment at its retail bankingbusiness ell by 22% thanks to

an improvement in all the leading

countries, especially the USA.

Signicant decrease o

impairment charges or

the majority o banks




30/76

27 IMPAIRMENTS

Impairment of loans (Million )

Impairment charge 2009

Impairment charge 2010

0

5,000

10,000

15,000

20,000

LBG Santander RBS HSBC UniCredit Barclays BNP BBVA Commerz- Socit ING Deutsche Nordea Standard UBS

Paribas bank Gnrale Bank Chartered


CorporateandInvestmentbankingbusiness: the impairment charges

recordedbyBNPParibasfellto314million(comparedto2,473million),whichincludesa99%decreaseintheprovision or nancing activities.

Improvedriskmanagementprocesses:forLBG,thefall(4,866million)ismainly due to eective portolio

management and improved quality o

new business.

StandardCharteredreduceditschargeforloanimpairmentby55%(770million) as a result o consistently

robust risk management processes

and underwriting standards, as well asimproving economic conditions in

most markets.

Run-offplans:RBSreduceditsimpairmentchargesby4,359millionrom management o its non-core book.

Impactoftheimpairmentchargeontheassets reclassied according to revised

IAS39:DeutscheBanksimpairmentchargefell1,357millionduetolowerprovisions or credit losses related to

exposures in leveraged nance that

werereclassiedin2009intotheloan category, creating a signicant

impairmentchargein2009.

Thedecreaseinimpairmentchargesacross the survey also results rom a

signicantly smaller increase in identied

non-perorming loans.

As can be seen rom the table on the let,

average growth in non-perorming loans

amounts to 10% in 2010, compared to

52%in2009.In 2010, the increase o non-perorming

loans primarily relates to:

Eurozoneexposures,notablyforRBSand LBG (Ireland), Barclays (Spain),

Standard Chartered (Middle East and

Other South Asia region) and Socit

Gnrale (Central and Eastern Europe).

Deteriorationoftheeconomicenvironment in Spain (Santander

and BBVA).

Impairment rate

(provision as percentage o gross

loans and advances)

With the growth rate o non-perorming

loans generally alling, although

the impairment charge is generally

decreasing, the resulting year-end

provision as a percentage o gross loans

and advances has, in act, improved or

the most part.

Movementsin non-

performingloans

Variation (%)2009/2010

Variation (%)2008/2009

Barclays + 68 + 29

Standard

Chartered

+ 25 + 31

Commerzbank + 17 + 25

UniCredit + 16 + 36

Santander + 16 + 73

LBG + 15 + 79

ING + 15 + 39

Nordea + 14 + 91

Socit

Gnrale

+ 10 + 62

BBVA + 3 + 78

RBS + 2 + 80

HSBC - 8 + 21

UBS - 27 - 37

Deutsche

Bank

- 28 + 115

Total + 10 + 52

Note : BNP Paribas had not disclosed its gross NPL

in2008.Therefore,itisnotcomparable.





31/76

28 IMPAIRMENTS

Impairment rate (Million / Percent)

Million Loans Percent1,000,000 Percent (%) of loans

3.57%

1.71%

2.33%

3.26%

2.63%2.44%

3.25%2.87% 2.96%

0.79%0.72%

2.27%

5.06%

4.48%

2.60%

3.47%3.06%

2.29%

0.80%

2.59%

1.27%

2.52%

3.05%

0.76%0.73%

2.84%

0.39%

0.94%0.89%1.11%

6

5800,000

4600,000

3400,000

2

200,0001

002010

2

009

2

010

2009

2

010

2009

2010

2009

2010

2009

2010

2009

2

010

2

009

2

010

2009

2010

2

009

2

010

2

009

2

010

2

009

2

010

2

009

2

010

2

009

2

010

2

009

2

010

2

009

HSBC BNP Santander RBS LBG ING UniCredit Barclays Socit DeutscheParibas Gnrale Bank BBVA Nordea Commerz- Standard UBSbank Chartered

Source: KPMG International, July 2011Note:Theimpairmentratepresentedinthegraphaboveistheprovision(individualandcollective)comparedtothegrossloans and advances (banks and customers).

Asin2009,theimpairmentrates(provision as percentage o gross loans

and advances) dier between the banks,

rangingfrom0.39%(UBS)to5.06%(UniCredit). On the whole, the impairment

rates observed in the sample increased,

except or our banks (Deutsche Bank,

Standard Chartered, UBS and HSBC).

Since the impairment charge in 2010 has

generally allen across the survey, the

increased impairment rate (provision as

percentage o gross loans and advances)

is a result o a stable credit portolio, and

thereore an improved percentage.

Deutsche Bank recorded a all in its

impairmentratefrom1.27%in2009to0.80%in2010duetotheriseofGerman

retail loan and commercial real estate

loanportfolios(150billion).ThedecreaserecordedbyHSBCisdueto the growth o loans and advances to

customers in portolios with historically

low loss experience (e.g. Asia) and

the run-o o the higher risk US

consumer portolio.

Non-perorming loans increased at a

lowerratethan2009andgenerallyrepresented a small amount o the

total credit portolios, as shown in

the graph on the next page.

Non-perorming loans

increased at a lower rate

thanin2009andgenerallyrepresent a small amounto the total credit portolios




32/76

29 IMPAIRMENTS

Impaired versus outstanding loans (Million )

0

800,000

1,000,000Impaired loans

Outstanding loans

600,000

400,000

200,000

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

2010

2009

HSBC BNP Santander LBG ING RBS Uni

financial reporting european banks 2010v2

Documents