As anyone who’s seen the Wolf of Wall Street will tell you, investment banking is where all the money is… or is it? While the investment divisions of Britain’s leading banks have struggled with forex rigging fines and the hefty costs of restructuring ‘bad debt’, retail-focused Santander has had no such problems.
Today, Europe’s largest retail bank reported a whopping 39% increase in its pre-tax profits for first three months of 2015, to €2.1bn (£1.5bn). Behind that success was a fairly profound recovery in its fortunes in continental Europe, though there was also healthy growth in the UK and the Americas. In both cases, Santander is taking up in 2015 where it left off in 2014.
The contrast with Britain’s banks is fairly clear. Last year, HSBC suffered a 17% slump in reported pre-tax profits, at Barclays it was down 21% and at RBS there was a £3.5bn loss. The only major player to do better was Lloyds (of which more later), which had profits quadruple from a low base.
Why the difference? Two factors stand out. Firstly, like so many British holidaymakers, Santander is benefitting from the weak Euro. Favourable currency 'tailwinds' doubled the growth in loans to 14% and were responsible for a quarter of the growth in profits.
More importantly still, 81% of Santander’s business is retail banking, meaning it’s stayed out of most of the practices that are alleged to have taken place at its investment-focused cousins and has thus avoided the tremendous fines that have shaken them.
Last year, Barclays set aside £1.3bn for Forex rigging fines and £1.1bn for compensation claims over the mis-selling of PPI. Lloyds, which has otherwise been performing well, set aside another £700m for PPI claims in its last quarter, bringing its total provisions to a staggering £12bn.
Compare that to Santander, which was slapped on the wrist with a paltry £12.5m FCA fine last year for offering poor investment advice and which has put aside £129m for PPI insurance claims. Small change, really.
In general, the post-crisis demands on investment banks to get their act together by applying stricter standards to its debt risks have made their lives tougher than retail banks’. At Barclays, for instance, the investment division last year suffered a 32% fall in underlying profits, while the retail division enjoyed a 29% increase.
There are some signs that the balance may be restored, however. Goldman Sachs and the Wall Street crew are rebounding very nicely, and the regulatory fines can’t keep coming forever. For the time being though, Santander chair Ana Botin will be pleased no doubt with its tried and tested high street strategy.