Bank statements become harder to read

Third of banks notch gains above €1bn on debt

European banks have made their financial statements longer and more complex despite the crisis, and it remains hard to judge risk and compare lenders, according to research from auditors KPMG.

KMPG's report, its third consecutive survey of transparency in 16 European banks' annual reports, found that the core sections of (financial statements, accounting policies and notes) increased by 20%. It said this was down to investors demanding more information amid the crisis.

The average length of annual reports increased by 3% to 317 pages.

As it is an auditor to some of the lenders in the study, KPMG stops short of actually forming opinions about the quality of individual bank reporting.

However, KPMG said it remained very tough for investors and analysts, whom it accused of relying on annual reports too heavily, to compare banks' accounts.

This was due to the disparity in the type of information provided, leeway offered by accounting rules and the complexity of both some standards and the nature of the banking industry.

Bill Michael, head of KPMG's UK financial services assurance, said: "If one considers the comparability of financial statements to be a primary goal, there is still some way to go."

Alluding to the UK Treasury Committee's call for annual reports to read more like histories and less like dictionaries, the foreword to the research said they remained too complex.

Five of the banks surveyed counterintuitively recorded gains of more than €1bn ($1.4bn) on their own debt when it fell in value. (This is because fair value accounting deems credit risk to fall when the value of debt falls.)

However, KPMG's research said while it was the case that many banks recorded such gains in 2007 and last year, it added: "Such gains will reverse in future years as it approaches maturity if the debt is not repurchased at the lower value."

Other highlights include:

• That liquidity, market and credit risk disclosures are difficult to interpret

• In spite of the perceived limitations of value-at-risk it remains the most common method to capture and control market risk exposure

• Loans on most banks' balance sheets have unexpectedly increased despite deleveraging across the industry. The research notes that this may be due to recent acquisitions and consolidation

• Five banks voluntarily disclosed a leverage ratio, although the definition and calculation methods are different

The 16 banks surveyed were: BNP Paribas, Société Générale (France); Commerzbank, Deutsche Bank (Germany); UniCredit (Italy); ING (Netherlands); BBVA, Santander (Spain); Nordea (Sweden); UBS (Switzerland); Barclays, HBOS, HSBC, Lloyds TSB, Royal Bank of Scotland, Standard Chartered (UK)

To read a full copy of the report, “Focus on Transparency 2009”, see www.kpmg.co.uk