LONDON BRIEFING:Despite the recent good results, great uncertainty hangs over British banks, writes FIONA WALSH
IMAGINE FOR a moment that you’ve spent the last three years on a desert island. You got there a few weeks before the run on Northern Rock in 2007 and, thanks to a lift from a cruise-liner, returned home last week. On glancing at the headlines, you read of bumper profits at Britain’s banks – and billion-pound bonuses for bankers.
Some of the names have changed – Lloyds Banking Group instead of Lloyds TSB, and why no headlines for HBOS? – but your natural assumption must be that life is pretty much as it was.
Business as usual was how it appeared last week, at least at first glance, as Britain’s big banks checked in with their first-half results. Together, they made a profit of more than £15 billion (€18 billion) and set aside some £6 billion in pay and bonuses.
Leading the pack was HSBC, with half-year profits virtually doubled at $11.1 billion (€8.47 billion). All the others topped analysts’ expectations too – Barclays with a 44 per cent jump to £3.95 billion, and Lloyds with a big swing from losses last time of £4 billion to a profit of £1.6 billion. Even RBS, 70 per cent-owned by the state, managed a profit of £1.1 billion – much bigger than expected.
This week marks the third anniversary of “the day the world changed”, the description by former Northern Rock boss Adam Applegarth of the way the credit markets dried up on August 9th, 2007. From the depths of the crisis after the Lehman collapse to last week’s bumper reporting season represents a remarkable turnaround for British banks, but it is still too soon to declare a return to normality.
Look beyond the bumper profit headlines of last week and you soon see that by far the biggest factor in the banks’ improved performance was a sharp reduction in bad debts. Added to that were benefits gleaned from cost-cutting – thousands of jobs have been axed from the sector – and from widening margins as their customers are made to pay more. Revenues at Britain’s big banks still have a way to go before full recovery, and that’s before the problems that would be created if the economy should slip into a double-dip recession.
The sector is being propped up with government money, and not just in the equity stakes in RBS and Lloyds but also in the form of the Bank of England’s Special Liquidity Scheme, the Credit Guarantee Scheme and the Asset Protection Scheme for toxic assets – all of which will ultimately have to be repaid or refinanced.
The banks still stand accused of failing to lend to consumers and small businesses – lending which was an implicit part of the government’s crisis support. The banks insist the demand is simply not there, and that instead loans are being repaid, or that some loans are too risky to make with their new, risk-averse hats on. But they are rattled enough to have proposed a taskforce to help tackle the issue.
Prospects of a break-up still loom over the sector, with the banking commission looking at whether the banks’ investment banking divisions should be separated from their high street operations. The commission is not due to report until autumn 2011, which means the government must retain its stakes in RBS and Lloyds for at least another year. Until we know whether they will be broken up – and the banks will fiercely resist any such moves, even threatening to move overseas, as Barclays hinted last week – there can be no such thing as business as usual for the sector.
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Having just returned from the desert island, you’re unlikely to be interested in snapping up one of the 650,000 flights and holidays that TUI, Europe’s largest travel firm, has yet to sell this summer.
Shares in the group, which owns Thomson Holidays, slumped 10 per cent yesterday as it warned profits will be hit as it is forced to cut its prices. Having enjoyed good demand early in the season, TUI says business tailed off after the coalition government’s emergency budget made a severe dent in consumer confidence. The good weather at home hasn’t helped, and holidaymakers are leaving it later than ever to book.
At the right price there’s plenty of demand. Figures from airports operator BAA yesterday showed Heathrow had its busiest-ever month in July and its busiest-ever day on July 18th, when 232,000 passengers flew in or out.
Fiona Walsh writes for the Guardiannewspaper in London
