Britain's battered banks pray for deliverance

The reporting season kicks off this week to the backdrop of sliding shares, the sub-prime crisis and a housing slowdown. Simon Evans reports
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The Independent Online

If a year ago you had suggested that the global banking sector would be mired with write-downs of £50bn and rights issues to come, you would have been carted off to an asylum.

But that is just what has happened, with the likes of Merrill Lynch, UBS, Morgan Stanley and Citigroup forced to go cap in hand to wealthy sovereign funds in the East looking for cash to plug their gaps.

Northern Rock apart, British banks have fared relatively well next to many of their global peers, but that's not to say things have been trouble free: the share prices of the UK's big five have all slumped.

Bradford & Bingley kicks off the banks reporting season this week; seven of the UK's biggest lending institutions will deliver full-year numbers by 3 March. As Alastair Ryan, a UBS banking analyst, says: "The ability of the wonderfully complex financial markets to spring further negative surprises should not be underestimated."

B&B – 13 February

The first brave soul to issue numbers, Bradford & Bingley, the UK's biggest buy-to-let lender, has also suffered in the fallout from the Northern Rock fiasco. A recent rights issue from buy-to-let group Paragon doesn't bode well for B&B, which last November sold off two blocks of loans worth £4.2bn.

Steven Crawshaw, its chief executive, insisted the move wasn't a fire sale of assets to prop up the business, but rather one to "... take advantage of the significant opportunities that exist in the mortgage market today".

Like Northern Rock and Alliance & Leicester, B&B remains reliant on wholesale market funding. A return to normality and the outlook might not be as bleak as some analysts suggest.

Barclays – 19 February

If any British bank dodged a bullet in 2007, it was Barclays. Last March, it revealed plans to buy its ailing Dutch rival, ABN Amro, in a deal worth more than £45bn. But after a protracted battle with a Royal Bank of Scotland-led consortium, Barclays eventually lost out. As markets tumbled, with billions being wiped off the share prices of banks across the globe, the sigh of relief coming from its chief executive, John Varley, must have been audible way beyond the firm's Canary Wharf headquarters.

But Barclays still has its problems. It is a big purveyor of the much-maligned Structured Investment Vehicle-Lite – products linked to the crisis-torn US sub-prime market – and traders have long feared that it has been underplaying the extent of potential write-downs. A trading statement from the bank in October revealed that a bad debt charge from its US business would come in at £1.3bn – comfortably less than the rumoured £10bn.

Scepticism remains: Barclays' share price has slumped from a 52-week high of 790p to 442p.

On the plus side, it is a much-changed beast, with more than half its profits coming from overseas operations. The Barclaycard business also looks to be on an upward path after suffering years of underperformance.

But it is the group's investment banking operation, led by the charismatic American Bob Diamond, that has been the cash cow for many years. How this division holds up could be the key.

A&L – 20 February

Alliance & Leicester shares have been sucked into the vortex created by the collapse of Northern Rock, shedding 45 per cent over the course of the past year.

Questions were asked of the business model and funding requirements of A&L, which operates in a similar way to the Newcastle-based lender.

The group revealed at the end of last year that it had secured funding until the end of the third quarter this year. Beyond then, the situation is uncertain.

A&L's depressed share price has long marked it out as a bid target, with a raft of suitors moo-ted. But Spain's Santander ended its interest last week.

A precipitous fall in the housing market in 2008 wouldlikely result in A&L suffering disproportionately.

Lloyds TSB – 22 February

The bank is known for paying a healthy dividend to its long-suffering shareholders, and this remains safe. But the rest ofthe business has underwhelmed analysts.

Luckily for its chief executive, Eric Daniels, the Lloyds business model is probably just what is wanted amid the market turbulence. The group has written down just £200m linked to the US sub-prime crisis and its British retail banking business has held up well.

But there are dark clouds on the horizon. A steep downturn in the UK economy will hit Lloyds harder than many of its more diversified rivals, and it will probably have to pay a hefty settlement to customers if some of the UK's banks lose their court case with the Office of Fair Trading over excess overdraft penalty charges. Lloyds has pursued one of the most aggressive anti-payout policies of all the banks.

HBOS – 27 February

The Halifax/Bank of Scotland group has largely avoided the travails of many of its rivals, but still its shares have slumped from a 52-week high of nearly £12 to around £6.50 at the moment.

The Andy Hornby-led group sidestepped the US sub-prime crisis with little in the way of discernible write-downs, while arresting a disastrous decline in its share of the UK mortgage market by getting rid of the man whose pricing strategy precipitated the fall – retail division chief Benny Higgins.

But the storm clouds are gathering. In its pre-close trading update, the group revealed it was battening down the hatches by suspending its share buy-back programme – a move the market took badly.

Given the status of the Halifax as the UK's biggest mortgage lender, the extent of the slowdown in the British housing market is likely to determine the fortunes of HBOS.

RBS – 28 February

Royal Bank of Scotland is facing a tough 2008. Although Sir Fred Goodwin, its chief executive, won his joust with Barclays, he probably wishes he hadn't.

Sir Fred may have garnered an enviable reputation for his management of the integration of NatWest in the 1990s, but many believe he has taken on a task too far with ABN Amro, which he is in the midst of carving up with consortium partners Fortis and Santander.

Analysts have suggested that RBS needs to shore up its balance sheet to the tune of £12bn, with Credit Suisse's Jonathan Pierce – one of the first to issue a "sell" note on Northern Rock last year – saying recently: "A rights issue is the only remaining option in our view. Of particular concern is the potential for further writedowns against structured finance and loan positions."

So far, sub-prime-linked write- downs at RBS have been minimal at just £1.2bn. But it isn't all bad news, with UK retail and corporate banking operations holding up well.

HSBC – 3 March

It was this time last year that HSBC shocked the market with the first profits warning in its 142-year history.

Losses emanating from its US sub-prime lending business cost the bank an initial £5.3bn charge and prompted a change in strategy, with chief executive Mike Geoghegan affirming a back-to-basics philosophy: "The buck now stops with me."

The big question for HSBC remains the extent of the hard landing in America and whether the bank's sub-prime business, the subject of sell-off rumours, suffers further deterioration.

On the plus side, HSBC looks to have fended off the demands of Knight Vinke, for a shake-up of the group's strategy.

Despite its travails last year, HSBC made plenty of smaller acquisitions, primarily in emerging markets such as Korea and Taiwan, and its investment banking business is at last showing tentative signs of recovery.

Indeed, the retrenchment has gone well enough for some analysts to tout it as a potential bidder for troubled French bank Société Gé*érale. After the year HSBC has just had, it might be wise to leave that to others.