Alarm bells greet bank reporting season

The only thing analysts agree about the forthcoming high street bank reporting season, which kicks off with Lloyds this Friday, is that the sector is the most difficult to call since the recession hit rock-bottom in 1992.

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.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: A Customer Service Advisor is r...

Ashdown Group: Trainee Consultant - Surrey / South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

SThree: HR Benefits Manager

£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

Day In a Page

The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
Yvette Cooper: We can't lose the election. There's too much on the line

Yvette Cooper: We can't lose the election. There's too much on the line

The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

It's not easy being Green

After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

Gorillas nearly missed

BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

The Downton Abbey effect

Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
China's wild panda numbers have increased by 17% since 2003, new census reveals

China's wild panda numbers on the up

New census reveals 17% since 2003