Looking beyond the numbers
Review of banks’ annual reports
There has been an unprecedented level of interest in banks’ financial statements during the last few years. Debate has taken place at G20 meetings and in parliamentary enquiries and stories about banks, including their reported performance, feature daily in our newspapers. The new Interim Financial Policy Committee and the Financial Services Authority are taking an active interest in information reported by banks. Given this scrutiny, it is timely to take a step back and evaluate the UK banks’ most recent annual reports.
The main findings of our report are:
- Banks’ annual reports have evolved over the last few years in an effort to provide all stakeholders with the information they demand. Change has also been driven by the industry and demands from regulators for enhanced and more clearly comparable disclosures. Consequently disclosures have extended beyond that mandated by accounting standards.
- In particular, further detail has been provided in relation to the current market focus areas including more extensive risk disclosures particularly funding and liquidity risk, specific reporting on exposures to sovereign risk, and enhanced detail on loans subject to forbearance.
- Given that some of the regulatory guidance and initiatives are new in 2011 there is some divergence in the disclosures provided. We expect that reporting will continue to evolve and become more standardised as banks reach a consensus on best practice reporting;
- Whilst the length of some of the annual reports by UK banks has grown to comply with the additional expectation on disclosures there has been an attempt to ‘reduce the clutter’ by aggregating key disclosures.
- Standardisation in certain areas may be appropriate; but what appears to be most beneficial is for management to explain in a clear and coherent manner what matters and risks relevant to a bank. It is important that disclosures evolve over time in response to the areas that warrant greater prominence from period to period.
In May 2012 the FSB announced the establishment of an Enhanced Disclosure Task Force (EDTF). The primary objectives of the EDTF are to (i) to develop principles for enhanced disclosures, based on current market conditions and risks, including ways to enhance the comparability of disclosures, and (ii) to identify leading practice risk disclosures presented in annual reports for 2011 year ends. On balance, the UK banks surveyed have and are continuing to make great efforts to meet this challenge. It is clear that annual reports of banks have improved over the recent past. Continued dialogue between investors, standard setters, regulators, auditors and the banks will remain vital to ensure information is appropriate and useful.