Jason Nissé: Lloyds TSB gets a bad report ? so will Barclays go top of the form?

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The British banking sector is a curious beast. At any one time there is always a hero and at least one dunce. If you can remember as far back as the third-world debt crisis of the mid-Eighties, Midland and Lloyds were the problem children and NatWest was considered to be the one best able to keep its nose clean. Then NatWest slipped on the banana skin that was the Blue Arrow scandal and was consigned to the laggards' corner, where it was joined shortly after by Barclays, which famously wrote off £425m on one loan, to property group Imry.

Midland was snapped up by HSBC, which has managed to keep out of the doghouse, except for brief sojourns during the Asian markets crisis of 1998 (even then Barclays managed to steal its seat, due to losing unfeasible amounts of money in Russia and on the LTCM fund manager).

And through all of this there has been but one hero – Lloyds. The group was stunned by its losses in South America and on the securities markets in the Eighties, so Sir Brian Pitman shod all of these irritations and concentrated on solid British retail financial services. It made a series of purchases – Cheltenham & Gloucester, TSB, Scottish Widows – and maintained its matinée idol status with solid, and sometimes spectacular, growth.

But Friday's interim results showed a different side to Lloyds TSB, as we now have to call it. Having lost the battle for Abbey National, which many felt it should never have launched, it turns in a 12 per cent drop in profits and loses £329m through the fall in the stock market. Friends of Peter Ellwood say you should look at the strong performance from insurance, but the rest of us will worry about the rising level of bad debts and un-Lloyds-like tendency to slip on banana skins. And there is a worry that the endowment mis-selling scandal could hit Lloyds TSB harder than most of its rivals, thanks to its historical commitment to bankassurance. So, if Lloyds TSB is going put on the dunce's hat after more than a decade as teacher's pet, who is the new top of the form?

Conventional wisdom might say that it is Royal Bank of Scotland. Having snapped up NatWest, after it had been softened up by Bank of Scotland, RBS unleashed Fred "the Shred" Goodwin, a man who looks like a mild-mannered accountant, but drives a Triumph Stag and takes to cost-cutting like a leach to a nudist colony. The integration has gone as well as anyone can expect, and RBS has renewed its oozing assault on the US, with the £2bn purchase of Mellon Bank.

But before one can place the laurel wreath on Fred Goodwin's head, one has to ask a couple of questions. The first is whether all we have seen with NatWest is RBS doing the easy part of the integration well, with the difficult stage yet to come. And the second is whether, even if Citizens is a superb operation, all this exposure to the US is entirely healthy.

Also there is the slight matter of the bank that would certainly win the award as "best improved student" – Barclays. Less than three years ago, the bank was in a state. Attempts to shake up its bureaucracy by the helicopter-brained Martin Taylor were in disarray. He was forced to sell off the equities business for less than a song and every move Barclays made was met with resistance. Taylor fell on his sword and his replacement lasted just a day before a heart problem sent him back to California. Sir George Mathewson of RBS turned up on Barclays' doorstep, offering a friendly merger and, but for two factors, could have successfully launched a hostile bid. The factors were NatWest becoming free and the recruitment of Matt Barrett to run Barclays.

Anyone who has met the loquacious Irish-Canadian cannot help but like him. He arrived from the Bank of Montreal with a curious pedigree, a failed merger in Canada and a high-profile ex-wife in the gossip columns. But he has cut through much of the pomposity that bedevilled Barclays, given it focus and allowed free reign to sub-bosses, such as Bob Diamond at Barclays Capital, and John Stewart, who arrived when it bought the Woolwich. Barclays now has one of the few growing investment banks in the world, an innovative product range (let's forget its tired credit card) and a motivated management. On Thursday, when it reveals half-year figures showing growth of 20 per cent or so, it could complete the transformation from doghouse to top dog.

But what now? Lloyds TSB has long talked about a European acquisition. But as Eli Wallach said in The Good, the Bad and the Ugly: "If you going to shoot, shoot, don't talk about it". Mr Barrett has hinted about expanding in Europe – he has decent businesses in France and Spain – but has never made this desire explicit in the way Peter Ellwood has. It would be rather in keeping with the style of the new hero of the banking sector to beat the former head boy to the European prize.