Black Horse leads charge

SHARES BLUE CHIP Lloyds is reaping the most from efficiency improvement s, as the top four clearing banks turn the tide

RESULTS last week from the banking group Hongkong & Shanghai Banking Corporation, owner of Midland Bank, rounded off the summer reporting season for the top UK high-street lenders. The four largest alone - Barclays, National Westminster, Lloyds and Midland, notched up pounds 3bn profits in total - and that was just for the half-year. It is all a far cry from the dark days of 1991 and 1992, when bad debts were wiping out profits and squeezing dividends.

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.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
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

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

SThree: Talent Acquisition Consultant

£22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...

Day In a Page

Seifeddine Rezgui: What motivated a shy student to kill 38 holidaymakers in Tunisia?

Making of a killer

What motivated a shy student to kill 38 holidaymakers in Tunisia?
UK Heatwave: Temperatures on the tube are going to exceed the legal limit for transporting cattle

Just when you thought your commute couldn't get any worse...

Heatwave will see temperatures on the Tube exceed legal limit for transporting cattle
Exclusive - The Real Stories of Migrant Britain: Swapping Bucharest for London

The Real Stories of Migrant Britain

Meet the man who swapped Romania for the UK in a bid to provide for his family, only to discover that the home he left behind wasn't quite what it seemed
Cheaper energy on the way, but it's not all sunshine and rainbows

Cheaper energy on the way, but it's not all sunshine and rainbows

Solar power will help bring down electricity prices over the next five years, according to a new report. But it’s cheap imports of ‘dirty power’ that will lower them the most
Katy Perry prevented from buying California convent for $14.5m after nuns sell to local businesswoman instead

No grace of God for Katy Perry as sisters act to stop her buying convent

Archdiocese sues nuns who turned down star’s $14.5m because they don’t approve of her
Ajmer: The ancient Indian metropolis chosen to be a 'smart city' where residents would just be happy to have power and running water

Residents just want water and power in a city chosen to be a ‘smart’ metropolis

The Indian Government has launched an ambitious plan to transform 100 of its crumbling cities
Michael Fassbender in 'Macbeth': The Scottish play on film, from Welles to Cheggers

Something wicked?

Films of Macbeth don’t always end well - just ask Orson Welles... and Keith Chegwin
10 best sun creams for body

10 best sun creams for body

Make sure you’re protected from head to toe in the heatwave
Wimbledon 2015: Nick Bollettieri - Milos Raonic has ability to get to the top but he must learn to handle pressure in big games

Nick Bollettieri's Wimbledon files

Milos Raonic has ability to get to the top but he must learn to handle pressure in big games
Women's World Cup 2015: How England's semi-final success could do wonders for both sexes

There is more than a shiny trophy to be won by England’s World Cup women

The success of the decidedly non-famous females wearing the Three Lions could do wonders for a ‘man’s game’ riddled with cynicism and greed
How to stop an asteroid hitting Earth: Would people co-operate to face down a global peril?

How to stop an asteroid hitting Earth

Would people cooperate to face a global peril?
Just one day to find €1.6bn: Greece edges nearer euro exit

One day to find €1.6bn

Greece is edging inexorably towards an exit from the euro
New 'Iron Man' augmented reality technology could help surgeons and firefighters, say scientists

'Iron Man' augmented reality technology could become reality

Holographic projections would provide extra information on objects in a person's visual field in real time
Sugary drinks 'are killing 184,000 adults around the world every year'

Sugary drinks are killing 184,000 adults around the world every year

The drinks that should be eliminated from people's diets
Pride of Place: Historians map out untold LGBT histories of locations throughout UK

Historians map out untold LGBT histories

Public are being asked to help improve the map