Many banks have taken an already complex issue and made it virtually impenetrable. My latest column for Financial News.
The opening credits to the 1996 movie Fargo declare “this is a true story”. But when the two Coen brothers who wrote and produced it were challenged on why they had claimed that the fictional plot of a failed car salesman having his wife kidnapped to cash in on the ransom from his wealthy father-in-law was true, they said they could claim anything they wanted. It’s the movies, after all.
There are stricter rules about what banks can and cannot claim in their results, but some of the banks’ latest quarterly numbers were stranger than fiction.
Take Barclays, where the word “adjusted” appeared in its 44-page third-quarter results announcement 99 times. Of course, Barclays fulfils its statutory obligations in reporting its performance to the letter, but it then seems to go out of its way to confuse the hell out of you by adjusting everything it sees fit.
This means that you have at least three different numbers for profits over any chosen period. You can take your pick: would you prefer pre-tax group profits over the first nine months of this year to be: a) £5 billion (down 20% on last year); b) £2.9 billion (three times higher than in 2012); or c) £3 billion (down 37%).
The “statutory” answer is c), the “adjusted” answer (how Barclays would like you to think about its results) is a), but arguably the most accurate guide to Barclays’ actual performance is b). Confused? Wait until you see Royal Bank of Scotland.
At RBS, you can choose from a) pre-tax profits of £740 million in the first nine months of this year (a massive improvement on losses of £3.1 billion last year); b) operating profits of £2.1 billion (down a mere 16% on last year); or c) a 30% decline to £656 million.
The problem here is what the banks choose to add in or take out when they adjust their numbers. Most banks rightly separate out “own credit” or “debt valuation adjustment”, known as DVA, a counter-intuitive accounting treatment of its own debt that is registered as a loss in the profit-and-loss statement when the bank’s credit profile improves, and as a gain when it deteriorates, which has little to do with underlying performance.
Beyond that it gets more confusing. In the first nine months of this year, the £5 billion number Barclays prefers leaves out £2 billion in provisions for mis-selling payment protection insurance to retail customers and interest rate swaps to small businesses, on the basis that these are exceptional or non-recurring costs (except that it has taken a charge for one or the other in five of the past seven quarters).
RBS does the same and then some (it calls them “one-off and other items”). In addition to own credit and legal provisions, RBS also leaves out “integration and restructuring costs” from its preferred measure of profits. This would be fine, were it not for the fact that RBS has spent an average of nearly £300 million a quarter for the past two years on “restructuring” and has taken a charge on PPI in six of the past seven quarters. It is unclear what the accounting term is for “recurring exceptionals”.
This sort of gymnastics is not unusual and is by no means unique to RBS or Barclays. Lots of banks (and other companies) are as transparent as cut glass when it suits them but as clear as mud when the numbers are less flattering. Citi, Deutsche Bank, and UBS have achieved remarkable results in improving the profitability in some divisions by waving a magic wand and moving some of the nasty stuff into a new division.
And to be clear, no one is doing anything wrong. Regulators on both sides of the Atlantic merely require that banks meet their statutory reporting requirements. Beyond that, they are (almost) free to disclose whatever numbers they choose in whatever format. And besides, banks are complex beasts so it would be naïve to expect their results to be simple.
But in their frantic efforts to flatter their performance they give the impression that they – like the makers of Fargo – think that fiction is preferable to fact.
- This article first appeared in the print edition of Financial News dated November 11, 2013