High profits mask banks' fears

The big high street banks are facing an uncomfortable annual results reporting season, starting with Lloyds on Friday. Despite making good profits the banks fear the advent of a Labour government and the continued absence of any real signs of underlying growth. Bad debts may be plummeting as the economy grows strongly, but threats by the Labour Party, coupled with flat loan growth, are leaving the stock market wary of the sector.

Yesterday Lloyds Bank saw its shares fall 4p to 546p, while TSB, which reported lacklustre figures three weeks ago, shed 5p to 247p.

The big four, Lloyds, Barclays, NatWest and Midland, should report 1994 profits of nearly £5bn after bad-debt provisions, compared with £3.5bn last time. This is the biggest recovery in profits since the Government imposed a windfall tax on the clearing banks in the early 1980s.

The dramatic leap is due overwhelmingly to falling provisions against bad debts rather than to growth in the banks' main business - lending. Loan growth remains flat as businesses and individuals remain wary of debt.

Falling provisions against sour loans also served to flatter profits in last year's reporting season, and analysts reckon the industry is approaching the bottom of the provisioning cycle. There are even signs that corporate lending is about to pick up, and with it the propensity of banks to incur bad debts.

Analysts are worried that intense competition has driven down lending margins to painfully low levels.

There are also widespread fears in the City that the banks will use big profits to go and buy other businesses, for the growth they cannot achieve in their own business. The City would not be thrilled by a rash of bids with banks offering to pay two to three times net assets for target companies.

There is certainly plenty of cash coming down the line. According to NatWest Markets, next year the four big banks will report profits after provisions of over £6.1bn, as bad debts fall even further to £1.45bn.

A static loan market means that bank results will depend very much on cost control. This factor was highlighted last week when NatWest warned its staff that it was starting a pay freeze - a path that Lloyds embarked on last year. Staff cuts and branch closures will remain a badge of management's devotion to shareholder value.

Further fuelling stock market concerns about the clearing banks is Labour's highly publicised criticisms of rising profits. The banks have been able to refute most of the attacks concerning rising charges during the recession, but bashing the banks remains politically popular.

One big drag on profits over 1994 has been the collapse in dealing profits. The collapse of the bond markets last spring and the ensuing weakness of equity markets has hit the banks' treasury operations as well as their investment banking divisions.

This will be less of a problem for Lloyds, which under chief executive Brian Pitman has withdrawn from non-retail activities and bid for Cheltenham & Gloucester Building Society, with the prospect of a relatively cheap retail customer base.

By contrast Barclays and NatWest have invested heavily in their investment banking sides, BZW and NatWest Markets respectively. Both banks have decided to follow their traditional corporate customers on the path away from lending and into the capital markets.

Goldman Sachs, one of the more bearish houses on banks, expects Barclays' pre-tax profits to almost triple, from £664m to £1,985m - a spectacular rise due mainly to bad-debt provisions falling from £1,869m to £600m.

Pre-tax profits at NatWest should rise from just under £1bn to just over £1.5bn, with bad-debt provisions down from £1,262m to £670m. Lloyds should enjoy almosty exactly the same profits growth, from £1bn to £1.5bn, but starting with far lower bad debt provisions of just £500m last time

More than 90 years of car history are coming to an end with the abolition of the paper car-tax disc
newsThis and other facts you never knew about the paper circle - completely obsolete tomorrow
Piers Morgan tells Scots they might not have to suffer living on the same island as him if they vote ‘No’ to Scottish Independence
peopleBroadcaster has a new role bringing 'the big stories that matter' to US
Arts and Entertainment
Kylie performs during her Kiss Me Once tour
musicReview: 26 years on from her first single, the pop princess tries just a bit too hard at London's O2
Life and Style
Moves to regulate e-cigarettes and similar products as medicines come amid increasing evidence of their effectiveness
healthHuge anti-smoking campaign kicks off on Wednesday
Life and Style
fashionEveryone, apparently
The erotic novel Fifty Shades of Grey has already been blamed for a rise in the number of callouts to the fire brigade for people trapped in handcuffs
voicesJustine Elyot: Since Fifty Shades there's no need to be secretive about it — everyone's at it
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
A new Banksy entitled 'Art Buff' has appeared in Folkestone, Kent
Arts and Entertainment
Shia LaBeouf is one of Brad Pitt's favourite actors in the world ever, apparently
filmsAn 'eccentric' choice, certainly
Life and Style
An Internet security expert has warned that voice recognition technology needs to be more secure
techExperts warn hackers could control our homes or spend our money simply by speaking
peopleBenjamin Netanyahu trolled by group promoting two-state solution
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Trust Accountant - Kent

NEGOTIABLE: Austen Lloyd: TRUST ACCOUNTANT - KENTIf you are a Chartered Accou...

Graduate Recruitment Consultant - 2013/14 Grads - No Exp Needed

£18000 - £20000 per annum + OTE £30000: SThree: SThree are a global FTSE 250 b...

Law Costs

Highly Competitive Salary: Austen Lloyd: CITY - Law Costs Draftsperson - NICHE...

Day In a Page

Isis is an hour from Baghdad, the Iraq army has little chance against it, and air strikes won't help

Isis an hour away from Baghdad -

and with no sign of Iraq army being able to make a successful counter-attack
Turner Prize 2014 is frustratingly timid

Turner Prize 2014 is frustratingly timid

The exhibition nods to rich and potentially brilliant ideas, but steps back
Last chance to see: Half the world’s animals have disappeared over the last 40 years

Last chance to see...

The Earth’s animal wildlife population has halved in 40 years
So here's why teenagers are always grumpy - and it's not what you think

Truth behind teens' grumpiness

Early school hours mess with their biological clocks
Why can no one stop hackers putting celebrities' private photos online?

Hacked photos: the third wave

Why can no one stop hackers putting celebrities' private photos online?
Royal Ballet star dubbed 'Charlize Theron in pointe shoes' takes on Manon

Homegrown ballerina is on the rise

Royal Ballet star Melissa Hamilton is about to tackle the role of Manon
Education, eduction, education? Our growing fascination with what really goes on in school

Education, education, education

TV documentaries filmed in classrooms are now a genre in their own right
It’s reasonable to negotiate with the likes of Isis, so why don’t we do it and save lives?

It’s perfectly reasonable to negotiate with villains like Isis

So why don’t we do it and save some lives?
This man just ran a marathon in under 2 hours 3 minutes. Is a 2-hour race in sight?

Is a sub-2-hour race now within sight?

Dennis Kimetto breaks marathon record
We shall not be moved, say Stratford's single parents fighting eviction

Inside the E15 'occupation'

We shall not be moved, say Stratford single parents
Air strikes alone will fail to stop Isis

Air strikes alone will fail to stop Isis

Talks between all touched by the crisis in Syria and Iraq can achieve as much as the Tornadoes, says Patrick Cockburn
Nadhim Zahawi: From a refugee on welfare to the heart of No 10

Nadhim Zahawi: From a refugee on welfare to the heart of No 10

The Tory MP speaks for the first time about the devastating effect of his father's bankruptcy
Witches: A history of misogyny

Witches: A history of misogyny

The sexist abuse that haunts modern life is nothing new: women have been 'trolled' in art for 500 years
Shona Rhimes interview: Meet the most powerful woman in US television

Meet the most powerful woman in US television

Writer and producer of shows like Grey's Anatomy, Shonda Rhimes now has her own evening of primetime TV – but she’s taking it in her stride
'Before They Pass Away': Endangered communities photographed 'like Kate Moss'

Endangered communities photographed 'like Kate Moss'

Jimmy Nelson travelled the world to photograph 35 threatened tribes in an unashamedly glamorous style