London Briefing/Fiona Walsh:Bradford & Bingley today kicks off what will almost certainly be another record-breaking reporting season for Britain's banks. By the time HSBC reports its results on March 3rd, the sector is expected to have racked up its highest yet combined profit of more than £42 billion (€56.5 billion) for 2007.
Bradford & Bingley will be the smallest, with profits of just over £300 million (€402 million), according to forecasts from analysts at Dresdner Kleinwort. The biggest, HSBC, is expected to produce a profit of almost $23 billion (€15.8 billion). In between will be RBS, now including ABN Amro, with about £6.7 billion; HBOS, forecast to make £5.7 billion; and Barclays with almost £7 billion.
The new peak in profits comes despite the multimillion-pound hit the sector has suffered in the wake of the credit crunch. The results season will include the latest calculations from the banks on their exposure to US subprime loans, which were repackaged into investment vehicles and exported around the world.
Although most sector followers are confident that the worst of the subprime news is already out, there is always the risk of more shocks still to come, so this year's crop of record results is unlikely to impress the market. Rather than looking at pretax profits, analysts will be concentrating on how much the industry will be writing off in impairment charges or bad debts.
According to Dresdner Kleinwort, the UK banks will pile up bad-debt provisions of almost £17 billion between them. Leading the field will be HSBC, which is particularly exposed to the subprime sector, with an expected overall impairment provision of $15 billion-plus.
In any case, these are likely to be the last set of bumper profit results the banking sector will enjoy for some time. Britain's banks are facing tougher trading conditions at home as the housing market stalls, repossessions mount and consumers cut back on spending.
Although prudent lenders have been turning away risky borrowers for some time, a recession or severe slowdown would push many of their existing borrowers over the edge, adding to the bad-debt mountain. That would have a knock-on effect on bank balance sheets, which are already straining under the market conditions, and possibly affect credit ratings, which govern the rate at which they can borrow funds.
The regulatory environment is also becoming less benign, with the industry awaiting a ruling from the British high court on the legality of the overdraft fees imposed on customers. If it goes against the banks, they face losing a major slice of income.
Rocking on
One bank that will be notable by its absence (from the reporting season if not the headlines) is Northern Rock. No date has been set for any figures from the lender, which has been reclassified as a public enterprise in a move that brings up to £100 billion of its liabilities on to Britain's national debt.
The move is said to be temporary and was forced because the scale of government support gave it effective control of the lender. But it breaches one of the UK treasury's golden rules - that public debt should not exceed 40 per cent of gross domestic product - and is yet another embarrassment for chancellor Alistair Darling.
Meanwhile, some of the shine seems to be coming off Sir Richard Branson's bid for the group. A number of shareholders have switched their support to the Northern Rock management team, which is threatening to sue the treasury if it gives the go-ahead to Virgin.
Branson has been forced to go back on a pledge that all 6,000 or so jobs at the bank will be safe if his takeover succeeds. Questions are also being asked about the £250 million valuation the deal implies for Branson's Virgin Money business, which would be injected into Northern Rock as part of Virgin's rescue plan.
A final decision on the bank is expected before the end of the month.
Fiona Walsh writes forthe Guardian newspaper in London
