Lloyds, which will kick off the banks' interim reporting season on Friday, is likely to be the only exception. At about pounds 100m, its provisions will be less than half the level of the same time last year, partly because of earlier heavy provisioning and a policy of shrinking its loan book. Pre-tax profits will also rise from pounds 369m to more than pounds 400m.
Other banks reporting over the next few weeks, however, will show little change or a slight worsening in bad debts. Barclays is likely to show a small rise to over pounds 1bn compared with an already high pounds 995m at the same time last year. The bank is still trying to recover from disastrous property loans.
National Westminster's provisions may also be slightly higher at about pounds 1.1bn, compared with pounds 1bn last time, while Abbey National and Standard Chartered's provisions may also rise.
The banks have been hit by a continuing high rate of company collapses, particularly in the property sector. But some analysts believe that the first hints of recovery may show through in the results in the form of higher profits before bad-debt provisions are subtracted. Even Barclays is expected to show a rise in pre-tax profits from pounds 51m to about pounds 200m for the six months.
Despite the continuing effects of recession on bank results, the stock market has already begun discounting the effects of recovery by marking bank shares sharply higher. In the past 12 months, the sector has risen by 60 per cent in anticipation of better times to come, and the shares have outperformed the UK stock market by 30 per cent.
The shares have climbed because the stock market believes that the bad debt provisions have now peaked. But rumours of rights issues have emerged, puncturing the rallies in recent weeks.