23 June 2004

FT: Merrill sees IAS hitting banks' earnings

New International Accounting Standards rules could hit earnings per share at some of the UK's largest banks including Royal Bank of Scotland, Barclays and Lloyds TSB, according to a new report.

Research published by Merrill Lynch showed that adjusted earnings per share could fall at 17 European banks if IAS were to be applied to 2003 results.

IAS, which is introduced next year, consists of a raft of accounting changes and means, for example, that banks must bring derivatives on to their balance sheets and change the way they account for insurance subsidiaries.

The Merrill report says that IAS could cut adjusted earnings per share by 6.9 per cent at Royal Bank of Scotland and Lloyds TSB, by 3.2 per cent at Barclays, by 3.8 per cent at HBOS and by 4.1 per cent at HSBC.

John-Paul Crutchley, analyst at Merrill Lynch, called the move to IAS reporting 'the biggest dislocation in financial reporting that we have ever witnessed'.

However, Merrill warned investors that it made a number of assumptions to arrive at its conclusions 'which carry a major health warning'.

Merrill believes the IAS rules will impact such banks as Barclays and HBOS because of higher pension charges under FRS 17/IAS 19 rules. It believes Barclays could be hit because of new rules that affect the expensing of share options and amortisation of own-use software. It says RBS could be hit by a 'large cosmetic decline' in net interest income reflecting the reclassification of preference shares as a liability under IAS 32.

However, some UK banks may benefit from the new standards, including Abbey National, which could see adjusted earnings per share rise by 41 per cent because the new IAS rules bolster the contribution of Abbey's life assurance division.

Other banks that would see their adjusted earnings per share increase would be Bradford & Bingley and Alliance & Leicester, according to the Merrill report.

Mr Crutchley said: 'Subject to the usual caveats, it looks to us as if the net beneficiaries of the transition to IAS will be the mid-cap banks with an excess of provisions like A&L and Northern Rock. Among the larger banks, HSBC looks the best positioned.'

He expects that the introduction of IAS will mean greater earnings volatility but IAS may bolster banks' Tier 1 ratios, the capital cushion regulators make them hold.

© FT plc