Friday, May 4, 2012

Telegraph's Harry Wilson asks 'Does it matter if a bank makes a profit or a loss?'

As bank earnings reporting season descends on us again, the Telegraph's Harry Wilson asked 'does it matter if a bank makes a profit or a loss?'


So long as banks do not provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details, it is impossible for market participants to know if net income has any relationship to the actual performance of the bank.

In an environment where regulators are blessing hiding losses through regulatory forbearance and suspension of mark to market accounting, a bank can make up any net income number it wants.  This is one of the reason that the OECD said that bank capital is meaningless.

Your humber blogger has been advocating since the beginning of the financial crisis that banks adopt ultra transparency and come clean about what is on and off their balance sheet.  It is only by doing this that market participants will be able to trust bank financial reporting again.

Recent results from major banks have brought home this question as lenders have reported a confusion confection of core operating profits, adjusted pre-tax profits, and statutory pre-tax losses. 
Last week, Barclays reported an adjusted pre-tax profit of £2.45bn, but a statutory pre- tax loss of £475m. On Tuesday Lloyds announced a statutory profit before tax of £288, however on a pre-tax, combined business basis, this more than doubled to £628m. 
Today Royal Bank of Scotland added its results into the mix, saying it had made an operating profit of £1.2bn, but a pre-tax loss of £1.4bn. 
Asked this morning whether the bank was in the red or the black for the first quarter, RBS chief executive, Stephen Hester, said he did not really care and that you could take the bank's results "anyway you want". 
Please re-read the highlighted text as it is an acknowledgement of just how meaningless the financial numbers are.
While Mr Hester's candour is commendable, can it really be right that investors in Britain's largest banks have been left with such a confusing range of measures to work out the most basic of financial figures. 
The blame for the current situation lies largely with the damage wrought to banks finances by the financial crisis. 
With vast amounts of multi-billion pound one-off items running through their accounts over several years combined with the complexity injected by the use of "good bank" "bad bank" models, simple reporting of basic figures has been lost....
Please re-read the highlighted text as it describes why banks must be required to provide ultra transparency so that market participants can assess what is truly going on.
not all banks have gone down this path. 
Whatever your views of Swiss bank UBS, its financial results published on Wednesday were commendably straight forward. Just like, Barclays and RBS, UBS had to report a large fall in profits due to the bizarre debt valuation adjustment rules that force banks to account for the rises and falls in the value of their own debt. 
Unlike its British peers, UBS did not attempt to guide its investors towards an "adjusted" profit number or any other figure that stripped out the impact of this charge. 
This may seem like financial pedantism, but it has very real implications. 
While Barclays and RBS gathered a blizzard of positive headlines hailing their improved performances and better than expected results, UBS's results produced a media reaction of disappointment and missed forecasts. 
Yet, if UBS had used a similar adjusted number rather than using the admirably straightforward "net profit attributable to UBS shareholders" the bank would have reported profits of nearly Sfr2bn rather than the Sfr827 it actually made. 
With perception so important in the banking industry, it is surely not desirable that such financial spin is being routinely perpetrated by leading financial institutions, trust, after all, is the thing that senior bankers continually tell us is the most important thing for the industry to regain. Tricky numbers are not the way to achieve that goal.
Well said. 

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