Banking recovery picks up as profits surge

Standard Chartered and UBS both unveil upbeat trading statements but bonuses push up expenses
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Standard Chartered and UBS became the latest banks to report bumper earnings, providing fresh evidence that a sector which was on its knees a couple of years ago is now recovering strongly.

The reputation of UBS as Switzerland's best and brightest bank was shattered by the credit crunch but yesterday the company was able to report that strong fixed-income revenues and higher margins from managing wealthy people's money had helped it to a first-quarter net profit of Sfr2.2bn (£1.3bn).

However, the chief executive, Oswald Grübel, admitted that higher bonuses were planned for UBS's investment bankers – including the 6,000 or so employed in London. While UBS, by contrast to American and British peers, does not disclose how much it pays to investment bankers on a quarterly basis, it did admit that its expenses had risen because it had set aside more money for the bonus pool. The investment banking arm saw profits surging from Sfr297m to Sfr1.19bn.

The company's British bankers are also set to move into new offices at Broadgate Circus, near Liverpool Street station, with British Land and Blackstone unveiling plans to build a new HQ for the London operations.

The fact that UBS – one of the biggest losers of the credit crunch – is recovering is a sign that a shakeout set in train by Mr Grübel is bearing some fruit. The earnings compare with analysts' forecasts for about Sfr2bn.

Mr Grübel also said that net client withdrawals fell to Sfr18bn in wealth and asset management from Sfr56bn the previous quarter. They remain the bank's biggest headache, but Mr Grübel said that they would stay "at relatively moderate levels in the near term" as confidence gradually recovers.

Standard Chartered, by contrast, was never in need of any state aid during the financial crisis. Most of its operations are in South-east Asia and emerging markets, so it was barely ruffled by the financial crisis.

Yesterday the bank said first quarter profits had hit a record, but did not give any numbers. In a trading statement, the company said: "The Group has had a very strong start to the year, with income and profit both higher than in the first quarter of 2009.

"There is an improved balance between the two businesses with consumer banking making a larger contribution to total income and to profit than in the comparable period of 2009. Furthermore, client income in wholesale banking is up strongly on the first quarter of 2009, reflecting our continued focus on deepening relationships with clients."

While Standard Chartered is something of an oddity in the banking sector, other "zombie" banks like UBS have also been showing signs of life in recent days. Significantly, the performance of both retail and more casino-style investment banking operations have suggested that the sector is recovering, even if sentiment was battered yesterday by continuing fears over the Greek financial crisis and its potential knock-on effects.

Lloyds surprised on the upside last week when it reported a return to profit and said it expected to be in the black at both the half and the full year, which raised hopes that the taxpayer may be able to recoup some of the £20bn of state funds that had been pumped in sooner than expected.

Ian Gordon, an analyst at Exane BNP Paribas, said that yesterday was a difficult one for share prices. However, he said: "If you look at operating performance it is fair to say that banking profitability is recovering and (share price) valuations are undemanding. The operational environment [is] not unfavourable."

Mr Gordon pointed out that investment banks benefit from cheap money while the margins retail banks are achieving on their lending are far in excess of what they enjoyed pre-credit crunch, even if the market for deposits remains highly competitive.

Nic Clarke, a banking analyst at Charles Stanley, said: "It's fair to say that so far, the UK economy has done better than expected. Lloyds, for example, has benefited from this because it is very much a geared play on the UK economy."