Banks walk tightrope: Return to big profits could backfire in competition changes

AS THE banks look forward to their best annual results season for several years, they are uncomfortably aware that they are about to be hit by a fresh wave of competition from Britain's building societies.

This could mark the high point for bank shares, which have more than doubled in the past two years.

The Treasury is understood to be on the point of relaxing the rule that confines the societies to drawing no more than four-tenths of their working capital from the money market. The rest must come from savers, who these days demand higher rates of interest.

'Without that constraint, the societies will be in a position to squeeze the profit margins the banks make on mortgages - one of their fastest-growing areas,' said David Pountney at Collins Stewart, one of the City's leading banking analysts.

Ironically, the banks may be only too happy to join in a price war, to help dissipate their profits. As our table of analysts' forecasts shows, the end of the recession will be marked by a sharp rebound in profits. But, unlike their behaviour in past recessions, the banks have not relied entirely on write-offs to improve profits. They have shrugged off widespread public criticism to raise charges and cut costs, mainly by sacking thousands of staff.

This is causing distinct unease among bank directors who remember the ferocity with which governments - even those previously thought sympathetic - can turn on the sector if they feel it is making too much profit.

Those fears - and shareholders' appetites - have been whetted by results already out from TSB Group and Royal Bank of Scotland Group, which have earlier year-ends. Both reported a healthy rebound in profits and dividends, increased by 20 per cent and 25 per cent respectively.

But analysts were quick to point out that these were one-off improvements - especially in the dividends. The general run of dividend increases is likely to be in the 10-15 per cent range, with Barclays' investors believed to be steeling themselves for little or no change.

'The key is going to be the dividend increases,' said Tim Clarke, analyst at stockbrokers Panmure Gordon. 'Standard Chartered and HSBC - Hong Kong & Shanghai Banking Corporation, which includes Midland - might keep up with Royal and TSB, but that is because they are mainly operating in a very different economic environment, the Far East.'

As his cautious forecasts suggest, Mr Clarke sees banking in long-term decline. He argues that it is a mature industry where the main growth prospects in recent years have either come from lending in untested geographical regions such as South America, or from entering new activities such as hire purchase, property lending, mortgages and stockbroking. Both initiatives involve high risk and both have ended in tears.

However, the problem underlying the forthcoming results is much more fundamental. After years of recession, people and - more worryingly - companies just do not want to borrow.

As Chris Ellerton, banking analyst at SG Warburg Securities, said: 'People who buy bank shares now are not going to make much in the long term.'

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
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

Guru Careers: Stockbroker

£Basic (OTE) + Uncapped Commission: Guru Careers: A Stockbroker (qualified / p...

Recruitment Genius: Financial Adviser

£20000 - £60000 per annum: Recruitment Genius: Are you recently QCA Level 4 qu...

SThree: Graduate Recruitment Resourcer

£20000 - £22500 per annum + OTE £30K: SThree: SThree Group have been well esta...

Guru Careers: Application Support Analyst / 1st Line Support

£25 - 30k: Guru Careers: We are seeking an Application Support Analyst / 1st L...

Day In a Page

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

How a costume drama became a Sunday night staple
Miliband promises no stamp duty for first-time buyers as he pushes Tories on housing

Miliband promises no stamp duty for first-time buyers

Labour leader pushes Tories on housing
Aviation history is littered with grand failures - from the the Bristol Brabazon to Concorde - but what went wrong with the SuperJumbo?

Aviation history is littered with grand failures

But what went wrong with the SuperJumbo?
Fear of Putin, Islamists and immigration is giving rise to a new generation of Soviet-style 'iron curtains' right across Europe

Fortress Europe?

Fear of Putin, Islamists and immigration is giving rise to a new generation of 'iron curtains'
Never mind what you're wearing, it's what you're reclining on

Never mind what you're wearing

It's what you're reclining on that matters
General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence