Bank profits - where does all the money go?

By Clare Matheson
BBC News online business reporter

HSBC makes less money out of its UK customers than elsewhere

HSBC has unveiled record profits of more than £9bn - but how does it account for making the equivalent of £1m an hour?

Interest payments on credit cards, loans and mortgages as well as overdraft charges all swell bank coffers.

But while bank profits soar so does individual debt - by July last year the UK owed more than £1 trillion on credit cards loans and mortgages.

Consumers may wince at the news that HSBC raked in £9.6bn last year, Royal Bank of Scotland £6.9bn and Barclays £4.6bn - however, the good news is the majority of the cash came from overseas rather than UK customers.

For example, HSBC chairman Sir John Bond said on Monday that just 24% of its profits came from the UK.

The rest came from Asia, Europe and the Americas - mainly from overseas investment in corporate banking.

Yet such arguments do little to cool claims of 'rip-off Britain' infecting the finance sector.

Charges attacked

Back in 2000, former telecoms regulator Don Cruickshank attacked banks for the way they treat their customers after carrying out a Treasury backed review of the banking industry.

Five years on he says little has changed.

Most people enjoy free banking and the UK is one of the few countries to get interest on current accounts, which is unheard of elsewhere Brian Capon, British Bankers Association

In particular, he wants to see improved customer handling and cheque clearing.

Moreover, credit card providers were criticised by a powerful parliamentary select committee for a lack of transparency over credit card charges, which was allowing some providers to charge exorbitant interest - often seven or eight times the Bank of England base rate.

"Obviously banks do make money on these charges," a spokesman for Moneyfacts, an independent financial analyst, said.

"People can't seem to justify the amounts charged. A £25 charge for late payment is seen as a penalty charge rather than to cover the cost of writing to you and so on."

However, a recent report from PriceWaterhouseCoopers (PwC) said 0% credit card balance transfer offers are actually costing UK banks £1bn a year in lost revenues.

'Good deal'

The British Bankers Association (BBA), which represents British banks, believes UK consumers are getting a "pretty good deal".

"Most people enjoy free banking and the UK is one of the few countries to get interest on current accounts, which is unheard of elsewhere," said spokesman Brian Capon.

Banks have a lot of charges to cover for their UK customers

Banks pay for letters, bank statements, branch networks, interest on accounts and rarely pass the cost onto the average customer.

"We did a survey and for those people who do pay charges - and most don't - we found that it costs them 70% less than in similar European countries," Mr Capon added.

"UK banks are good at running a business. The return they get on the capital needed to keep going is 1% which is not a huge return. It's their sheer size that makes the numbers big."

Knock-on effects

But profits are not just news for consumers and investors - they have repercussions for the whole of the economy.

In Japan, interest rates are effectively zero to prevent big name company debtors going bust, which could lead to the country's worst unemployment crisis for half a century.

Following a decade long economic downturn in the country, the stocks, shares and property owned by firms is now just a fraction of their original worth.

And while banks cope with such huge debts, small businesses are suffering as banks are refusing to lend to them - further crippling chances of an economic recovery.

However, in the UK the situation is quite the reverse.

The industry employs one million people and contributes 5.3% to the country's gross domestic product.

Of bank profits, roughly a third goes toward corporation tax collected by the Treasury - without that money it would be very difficult for the government to put cash into schools and hospitals.

A further third of the profits is either returned to shareholders or goes into personal and company pensions, according to the BBA.

So while the consumers may look on in dismay at the huge profits made, they can rest easy that it will go towards a more secure retirement