Companies bounce back to health: Improving debt climate means boost for banksStrong order books to confirm upturn in manufacturing

DRAMATIC improvements in the health of British companies' balance sheets will enable clearing banks to slash their provisions for bad debts by pounds 385m in 1994, according to a survey by BZW and the information group Dun & Bradstreet.

Better corporate credit-worthiness in the second quarter of this year was particularly evident in the long-stricken commercial property sector.

More good news is expected this week with the publication of the Confederation of British Industry's quarterly industrial trends survey, expected to show improvements in the manufacturing sector as a result of strong order books.

BZW analyst Hugh Pye has cut domestic bad debt provision forecasts for 1994 by pounds 150m at Barclays, pounds 75m at NatWest, pounds 60m at Lloyds, pounds 40m at Midland, and pounds 30m each at Bank of Scotland and Royal Bank of Scotland.

Using Dun & Bradstreet's data on thousands of companies in the UK enables BZW to analyse the impact on the high-street banks 'at the sharp end'. The improvement in credit-worthiness, as low interest rates and improving demand help them to rebuild their balance sheets, will be the best news for the clearing banks in the next interim results season.

The BZW/D&B study estimates the amount of bank loans to companies no longer classified as high risk at pounds 6bn. 'This could increase banks' willingness to lend,' it said.

Mr Pye said the upturn was steepest in the South-east, South- west and East Anglia, where Barclays and Lloyds had the highest concentration of market share. But he warned that these regions still contained the highest proportion of high-risk companies.

Total bad debts for the high- street banks soared to pounds 5.6bn in 1991 and pounds 6.1bn in 1992, but are forecast to fall to less than pounds 2bn this year and even lower in 1995.

Mr Pye said the upturn in the South-east was particularly important as the region contained 40 per cent of all UK companies, and 49 per cent of all those with a poor credit rating. Barclays Bank is principal banker to 31 per cent of companies in the South-east and 40 per cent in East Anglia, compared with its UK market share of 26 per cent.

Lloyds has just over a quarter of the market in the South-west, compared with 14 per cent for the UK as a whole.

Among industries, a sharp improvement in the commercial property sector is good news for Barclays which has nearly a third of the entire UK property lending market. Barclays ran into trouble for over-lending to property companies in the late 1980s, and the resulting bad debts have been a huge drag on its performance.

Mr Pye has increased his 1994 pre-tax profits forecasts to: Barclays pounds 1,850m, NatWest pounds 1,575m, Lloyds pounds 1,385m, HSBC pounds 2,800m, Royal Bank pounds 490m, and Bank of Scotland pounds 430m.

The BZW/D&B survey should be backed up by further encouraging signs on industry's health with publication this week of the CBI's quarterly industrial trends survey. It is expected to show continued robust growth in the manufacturing sector, driven by relatively buoyant orders at home and from abroad. The motor industry is also becoming increasingly optimistic that car sales are likely to reach record levels in the key month of August, with sales topping half a million.

Gross domestic product figures released on Friday showed that growth is already set to outstrip the Treasury's summer forecast, published late last month, of 2.75 per cent expansion this year. The CBI survey should reinforce the upbeat mood, although City analysts are nervous that it may show signs of inflationary pressure being rekindled.