I recently read the annual reports of the five major banks in the UK doing what I do. I look for the fun in the serious.
Volatility
Banks adore volatility because they litter it throughout their annual reports. Everything can be volatile from the ordinary market or credit and capital markets to the bizarre: ‘policyholder interest’s volatility’ and a complicated: ‘volatility of the FVOCI portfolio in the liquidity pool’. Volatility can apparently be positive and negative. I found ‘negative market volatility’. Volatility by definition means going up and down, perhaps negative volatility means going left and right. I even found an accounting volatility. I cannot imagine what that could be. According to Lloyds [1] it arises from ‘hedge accounting ineffectiveness’. Santander [2] introduce a vague ‘macro volatility’ which they believe challenges them. Banks have also introduced volatility models noting ‘advanced stochastic volatility models’ which helps them calculate fair values. Volatility has become predictable in annual reports of UK banks.
Rote
The banks race each other for who is highest in rote. To get away from the boring connotation of rote learning they write it RoTE: return on tangible equity and, no doubt, calculate it by rote. Out ahead in the race is Nat West [3] with a RoTE of 17.8% and Santander a close second with 16.3%. The others announce their rate and then make a complementary calculation excluding whatever transactions, provisions and impairments they can dig up to appear better. One bank calculates the return on average tangible equity which one presumes is higher than just ordinary RoTE. All subtle adjustments are welcome.
Greenwashing and diving
The banks all insist on the reliability of their controls, processes and systems to ensure they never, knowingly or unknowingly, make inaccurate, unclear, misleading, exaggerating or unsubstantiated claims regarding sustainability, called greenwashing sometimes greenwashing risk. They use wide ranging methods to, as they say ‘mitigate the risk’.
Santander has invented the SFICS: ‘sustainable finance and investment classification system’. A committee at Lloyds dives deep into their ‘Climate Risk Deep Dive’ to mitigate the risk of greenwashing.
Moreover, Lloyds deep dives into one pool of ‘current priority areas’ but they deep dive, not into, but on many others for example ‘on regional development and financial empowerment’ and ‘on selected emerging risk themes’. Other banks like diving into swimming pools too. HSBC deep dives on their ‘sustainability execution programme’ and it has a ‘deep pool of liquidity’ which strengthens the balance sheet, but it doesn’t seem to want to dive into it. The board of NatWest made two deep dives on ‘the Digital X strategy’. Santander dives on strategy too; a complicated deep dive on the ‘operational resilience scenario mitigation strategy’. Not to be outdone, Barclays dives deep into the simple ‘special projects’, but it does have deep roots in the UK and roots itself deeply in the domestic market.
Ring-fencing
Since January 2019, UK legislation requires large UK banks to separate personal banking services from investment banking. They call this ring-fencing sometimes ring fencing or ringfencing. NatWest alone uses all three variations in their annual report. Santander doesn’t write anything about how well they manage ring-fencing, so we don’t know how they manage it at all. NatWest gives details of how they manage it with the appointment of three DINEDs, nothing to do with dining. They are, not single but ‘double independent non-executive directors’. Barclays [4] manage ring-fencing with buffers or what they call a firm-specific SRB: systemic risk buffer; a term only know by bank experts. Lloyds have introduced ring-fenced banks sub-groups and non-ring-fenced banks sub-groups. HSBC [5] have a bizarre ‘ServCo group’ to manage ring-fencing. A wide variety of supports to ring the fence: directors, buffers, sub-groups and a ServCos.
Churn
And then I found ‘deposit churn’ on page 68 of the Lloyds annual report. Bankers will clearly recognise my technical banking ignorance in believing that an institute that invests money deposited by customers would agitate milk in a churn to make butter. I made a quick check with the other banks to see what they were churning. I found no churns, no deposit churns and no churning. Only Lloyds worries about the frequent movement of funds in and out of deposit accounts, other banks do not consider deposit churns worth including in the annual reports.
Conclusion
Read in isolation each annual report radiates confidence and enthusiasm. But read together they drift towards unintentional comedy bordering on the absurd. They have a fascination with volatility that moves in every conceivable direction. They race for the highest rote. They insist on flawless anti-green washing controls while diving deeply into everything but water and they have an urge to put up fences everywhere. Meanwhile, a solitary bank springs the churn of a deposit deep in the core of its report.
[1] Lloyds Banking Group plc, Annual Report and Accounts 2024
[2] Banco Santander, S.A. and subsidiaries, 2024 Annual Report
[3] NatWest Group plc, 2023 Annual Report and Accounts
[4] Barclays plc, Annual Report 2023
[5] HSBC Holdings plc, Annual Report and Accounts 2023