Since then, bank profits have been driven by writing back bad debt provisions, which hit a peak of pounds 6bn three years ago.
Operating profits before provisions since 1992 have been caught between the need to cut cost and the lack of loan demand, which has remained sluggish.
The alarm bells are sounding for the banking sector in the next few weeks as the bottom of the bad debt cycle is approached.
Hugh Pye, an analyst with BZW, warns that fully three-quarters of the bank's increase in interim profits year on year will come from lower bad debts. His forecast of an increase in the clearing bank's pre-tax profits from pounds 4.53bn in the first half of 1994 to pounds 4.95bn is largely driven by these bad debt reductions, and only a fraction of higher operating profits.
Mr Pye says the fall in bad debts "will run out this year".
Lloyds Bank has done well by chief executive Brian Pitmann's devotion to cost cutting and shareholder value. Even here, analysts' forecasts veer wildly between pounds 800m and pounds 900m.
The profits will be flattered by two big exceptional items - pounds 82m from the sale of its stake in Standard Chartered and pounds 111m from its sale of shares in 3i, Europe's largest venture capital group. The key question then will be how well the high street banking and insurance active operations have performed, together with write-backs of its less developed countries' debt book.
Analysts are reasonably optimistic that Lloyds' banking and insurance operations will perform satisfactorily, but other banks, building societies and insurance companies have all warned that the sale of life and general insurance products has seen a savage downturn this year. TSB's recent profits were marred by big falls in sales of life assurance and pension products.
The concept of "bancassurance" has been taken up enthusiastically by British banks as loan demand has remained low, but financial services products have been badly hit by the pensions mis-selling scandal and tougher sales disclosure rules.
Mr Pye thinks that for the bank sector as a whole, the key themes will be general lacklustre growth in domestic lending and net interest income, flat income from fees and commissions, but higher earnings from dealing operations.
Branches will continue to close but the cost savings will not be as dramatic as in recent years. Overall, Mr Pye forecasts total income for the bank sector to rise by 3 per cent but costs to edge up by 3.5 per cent. Provisions against bad debts, however, will still fall by 25 per cent, enabling the banks again to increase their interim profits.
He expects dividends to grow by an average of six per cent, against a 20 per cent growth in the first half of 1994. He believes earnings per share, however, will fall far more dramatically - from a rise of 61 per cent last time to a rise of just 10 per cent this time.
Two banks which will buck this trend are HSBC and Standard Chartered, which are both being driven by their operations in the boom economies of South-east Asia. They will both enjoy operating profit increases of 14 per cent, he says.
This reporting season should be the first opportunity for Barclays' recently installed chief executive, Martin Taylor, to show benefits of new concentration on shareholder value.
Mr Pye concludes that we have got used to the clearers declaring profits ahead of expectations. This time, disappointments are more likely. Having said that, the long-term outlook for banks is reasonably good as the environment is "quite benign" and managements are behaving sensibly.Reuse content