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Business Analysis & Features

They think the banking crisis is over...

... but it isn't yet, says Nick Goodway, as bailouts, scandals and changing regulations dim the glow of resurgent profits

Over the last 10 days, the UK's big five stock market listed banks have reported total profits of just short of £19bn for the first six months of the year. This suggests that while they will not match the £56bn they made together in 2007, the year before the financial crisis really struck, they are on course for a very strong outcome in 2013.

It might even be fair to ask: "Is the banking crisis over?"

It would be nice, but totally incorrect, to answer in the affirmative.

The fact is that the taxpayer is still owed £65bn from the bailouts of Lloyds and Royal Bank of Scotland. Recovery of all that remains years away.

All the banks are smaller and leaner than they were six years ago, with more than 50,000 jobs gone from the sector. And the legacy of the financial crisis continues with massive changes to regulation both locally and globally, requiring the banks to bolster their balance sheets with extra capital that, as a result, they cannot lend out to cash-strapped small businesses or consumers.

At the same time, each of the banks has its own individual problems and issues to surmount. The end of the first-half reporting season left seasoned bank watchers with a more than a usually mixed bag.

Barclays kicked off with a call on its investors for an extra £6bn through a share issue to help fill the £12.8bn gap in its balance sheet identified by the Prudential Regulation Authority (PRA). The cash call was larger than expected, as too was an extra £2bn set aside for mis-selling payment protection and interest-rate swaps.

But Barclays' chief executive Antony Jenkins – the Captain Mainwaring of UK banking – sugared the pill with the promise of bigger dividend payouts from 2014. He claimed the bank was acting "quickly and decisively" with a "bold but balanced plan" to meet the regulator's demands.

The mis-selling charges knocked Barclays' profits back by 17 per cent to £3.6bn but Mr Jenkins said there was good underlying momentum in the business.

For Lloyds and then RBS, there was a welcome return to the black in the first half for the first time since their respective £20bn and £45bn bailouts. At Lloyds, the chief executive, Antonio Horta-Osorio, positively basked in the turnaround. He said: "We are delivering quarter-on-quarter improvement in a sustainable and boring way like a good retail and commercial bank should."

With Lloyds opening discussions with the PRA on restarting dividends that were suspended in 2008, and Mr Horta-Osorio suggesting that the bank could eventually pay out as much as 70 per cent of earnings, the shares took off. At 74.26p, they are above both the 73.6p average price paid by the taxpayer and the 63.1p that the Treasury uses as its breakeven figure. The sale of the taxpayers' 39 per cent stake in Lloyds could start as early as next month.

If only the bank could find a chairman to replace Sir Win Bischoff.

In contrast to Lloyds, the Chancellor cannot look for an early sell-off of the state's 81 per cent stake in RBS. The big – but well leaked – news here was the appointment of Ross McEwan as chief executive. Announcing that a banker can get by on just £1m a year, Mr McEwan's arrival was welcomed by George Osborne. But the outgoing chief executive, Stephen Hester (who has almost certainly taken the Chancellor off his Christmas card list), made it clear that he can't see the privatisation of RBS happening until at least 2015.

He said: "We are roughly a year behind Lloyds in rebuilding our capital ratios. That means we should be ready for privatisation towards the end of 2014. But whether the share price and stock market are where the Government would want them to be is another matter."

At 317.7p, RBS shares still languish far below the average 499p price paid by the taxpayer. While Mr McEwan is regarded as a more than safe pair of hands to continue the rebuilding of RBS started by Mr Hester, the big share sell-off will almost certainly require a more charismatic and City-focused chairman than Sir Philip Hampton.

At HSBC, the focus was not so much on the slight profit miss – with $14.1bn (£9.2bn) about $500m short of analysts' forecasts – but on how it will deal with new European rules capping bankers' bonuses.

The chairman, Douglas Flint, was certain the bank could pay its people enough to dissuade them from moving to rivals, while still remaining within the letter of the law. That almost certainly means hefty hikes in basic salaries, though, and an increase in the fixed-cost base does not sit so easily with chief executive Stuart Gulliver's cost-cutting agenda, which has seen the bank sell or close 54 businesses in the past 30 months.

HSBC also sent something of a shudder through investors with its warning that fast-growing economies such as China would produce "slower growth in the short term".

Standard Chartered ended the half- year reports with confirmation that it will miss its historical double-digit growth for the first time in more than a decade this year. The bank also took a $1bn hit on the value of its South Korean bank, which it bought for $3.3bn eight years ago.

The chief executive Peter Sands, whose Teflon image was badly scratched by last year's $327m money-laundering fine, said: "We are still expecting to grow our business at a good rate this year and remain confident in the potential of strategy and growth of our markets."

However, with the Libor-rigging scandal rolling on, regulation changing by the minute and economies in many countries still tiptoeing towards recovery, there remains plenty that could go wrong for the banks before this year ends.

So, no, the banking crisis is not all over yet.

Bad bank clears more debt but says it won't give assets away

The "bad" British bank formed from the remains of Northern Rock and Bradford & Bingley after they were nationalised returned £1.9bn to taxpayers in the first half of the year.

UK Asset Resolution (UKAR) said that it has now paid off £6.6bn of government loans since it was created at the start of 2010, bringing the balance down to £42.1bn.

Richard Banks, chief executive of UKAR, said: "The number of people three months or more in arrears has come down by 17 per cent so far this year and we have fewer repossessions. Things are getting slightly easier for our customers but there is always the caveat that we are still in a very low-interest environment. I don't see interest rates going up in the immediate future, but when they do, some of customers could be stretched."

He is particularly concerned about people on interest-only mortgages, and UKAR has started writing to those who are approaching the end of their mortgages to ensure they are prepared. Mr Banks also said that after the £400m sale of Northern Rock's unsecured personal loan book last month, there was plenty of interest in other parts of UKAR.

However, he added: "We are not going to give assets away by selling them cheaply. Our task is to make money for the taxpayer, and as our business and the loans become seasoned, they become more valuable."

UKAR has 489,000 customers with loans totalling £66.1bn.