Over the past two weeks, Lloyds (LSE: LLOY) (NYSE: LYG.US) Royal Bank of Scotland (LSE: RBS) and Barclays (LSE: BARC) (NYSE: BCS.US) have all reported their first-half results, and it seems as if things are getting better within the banking industry.
Not clear
Lloyds, RBS and Barclays all reported strong profits during the first half of the year, despite regulatory headwinds and additional PPI claims. However, it’s starting to become difficult to tell how much profit banks are actually making, as their financial reports are becoming increasingly difficult to understand.
In particular, the gap between adjusted net income and standard net income has been growing, and it’s becoming hard to tell how much profit a bank is actually making.
Mis-selling
Lloyds reported an impressive start to the year. During the first half, adjusted profits surged to £3.8bn, but the bank only reported statutory profits of £863m, a full 77% lower. This was a result of insurance mis-selling claims. Specifically, the statutory profit figure includes PPI claims paid out by the bank, the higher figure is what would have been reported if the bank had not paid out.
If this seems confusing then Barclays’ results will make even less sense. Barclays’ results showed that the bank’s adjusted profit before tax was down 7% to £3.3bn, although statutory profit before tax was £2.1bn, reflecting an additional £900m of provisions for PPI redress. Adjusted group profit attributable to shareholders was £1.8bn, after accounting for all additional costs and charges taken by the bank during the period.Â
And finally, RBS’s results, which were higher than expected but still confusing. The bank reported operating profit, excluding restructuring and litigation and conduct costs of £3.4bn. However, reported profit before tax was £2.7bn, which includes credit adjustment charges, the cost of redeeming the bank’s own debt and writing down the value of some investments.Â
What does it all mean?
For many investors, all the different figures reported by these banks are highly confusing. It’s hard to get a handle on it all, but the one thing investors need to keep an eye on is the bottom line, statutory reported profits in other words.
This is usually the lowest profit figure reported by the bank and excludes any ‘window dressing’, or accounting tricks, which can be used to make the bank’s results look better than they actually are.