The bad-debt tide has turned, and against a background of more modest growth in lending to customers, banks have had to shape up, cutting costs and jobs. As a result, the sector has outperformed the stock market and looks destined for steady continued growth. So, if you are looking to add a clearing bank to your shares portfolio, which of the big four should you go for?
The healthy-looking interim profit rises - ranging from 9 per cent at Barclays to 21 per cent at Lloyds - disguise a more diverse picture.
NatWest, despite a 14 per cent rise in pre-tax profits to pounds 872m, emerged with the fewest plaudits. Much of the improvement was thanks to a drop in bad-debt provisions. And the profits of the bank's core high-street banking business fell. Analysts also seized on NatWest's high cost base. Its ratio of costs to income - a key measure of a bank's efficiency - rose to just under 70 per cent, making it the worst performer in the sector.
Views are more positive towards HSBC, where pre-tax profits jumped 19 per cent to pounds l.74bn, including a pounds 527m contribution from Midland Bank.
But analysts were quick to point out the flattering effect of higher dealing profits and lower bad debts. "If you strip these out, underlying profits fell, which shows Midland Bank has a long way to go," noted one.
Midland's costs also rose in the first half, up pounds 100m to more than pounds lbn, giving a high cost/income ratio of 68 per cent. About 40 per cent of HSBC profits comes from Hong Kong, but there remain a number of questions over the handover to China in 1997 that may cloud the outlook.
Barclays is still undergoing its costly restructuring but lifted profits by 8 per cent to pounds l.12bn, with the dividend 19 per cent higher at 9.5p. The bank has made strides in polishing up its act, and the recent rise in its share price reflects what one analyst calls the "Martin Taylor sparkle factor". The chief executive's appointment from Courtaulds was seen as indicative of the group's willingness to adopt a more radical strategic approach.
The benefits of investment in its core banking business have yet to filter through to the bottom line, and Barclays has more problems to tackle - such as the pounds 200m loss in its French operations. But the market is fairly confident that the bank can deliver jam tomorrow.
But the best prospective investment is Lloyds, the first of the banks to report interims, which set the pace with profits up 21 per cent to pounds 735m, a dividend ahead 15 per cent to 8.6p, and costs up just 2 per cent to give it an enviable cost/income ratio of 62 per cent.
The results included the gain from its sale of stakes in 3i and Standard Chartered, and although there was a larger-than- expected bad-debt provision, the underlying performance of the group was strong: the core high-street business boosted profits by 26 per cent.
For a decade, the Lloyds management team, led by Sir Brian Pitman, has been the favourite of the City. Having completed its restructuring, the bank is already reaping the benefits of greater efficiency.
"Lloyds is the most adept strategically of the banks," says Richard Coleman, banking analyst at Smith New Court.
Lloyds' pounds l.8bn acquisition of the Cheltenham & Gloucester building society propels it into the top five of mortgage lenders in the UK. The benefits of the C&G addition will begin to show in the second half, but its potential will only emerge if and when the housing market shows sustained recovery.
Size counts in the mortgage market, as such groups as Abbey National and the Halifax flex their muscles. Lloyds will be able to draw on its large customer base, pricing flexibility, and strong high street presence.
Lloyds shares have had a good run in the wake of the first- half results, recovering from some underperformance in May and June. However, they are still below their 1995 peak of 710p.
This year, Lloyds profits are set to top pounds l.5bn, with a dividend of around 29.5p forecast. The yield is an attractive 5.4, and the current price- earnings ratio at 10.6 is only just above the sector average of 10.
Now looks a good time to get on board, as the Black Horse gets into its stride.