Bank bosses have done little to improve performance at their companies despite the recent round of strong results and will be all but powerless in the event of a double-dip downturn, Standard & Poor's Ratings (S&P) warned yesterday.
The rating agency said Royal Bank of Scotland, Lloyds Banking Group, HSBC and Barclays had all posted "encouraging" first-half profits this month.
But S&P also warned that this cannot be taken to be a sustained trend, saying the reversal of fortunes was largely down to a rebound in the wider economy and the help of Government stimulus packages. These economic and market developments will "continue to disproportionately influence UK bank ratings throughout the remainder of 2010", the ratings agency's analysts said. While S&P said banking bosses' had contributed to the positive results by cutting costs, diversifying assets and strengthen their balance sheets, it said that "the more important contributory factors were the developments beyond the control of the banks' management".
Earlier this month, Lloyds revealed that first-half profits had hit £1.6bn, swinging from a £4bn loss the previous year, which was backed by its chief executive Eric Daniels as a "significant milestone". RBS returned to profits of £9m after losing £1bn in the first half of 2009, while HSBC doubled profits to £7.1bn. Barclays' profits rose 44 per cent to £3.9bn.
Peter Dutton, managing director of S&P, said: "Monetary policy has been quite conducive to banks making solid trading profits," before warning: "that's a game that has to come to an end."
The banks had reduced their loan impairment charges "quicker than we expected a year ago", the rating agency said. This reflected the partial recovery in the British property markets, small declines in consumer credit impairments, the positive impact of low interest rates on debt costs, no significant company collapses and the UK's "relatively resilient" economic performance in the first half of 2010. The British economy was estimated to have grown 1.1 per cent in gross domestic product in the second quarter.
Yet the banks admitted the outlook for the UK economy was uncertain, and S&P warned that the Government's austerity measures "appear likely to squeeze disposable incomes and reduce public sector employment". Several banks face deeper-rooted issues, the agency said, with some "overly reliant on wholesale funding that is Government guaranteed or central bank funded, and still face significant refinancing requirements over the next couple of years".
S&P yesterday predicted that in the second half of the year the demand for credit muted, with loans potentially falling, and net interest margin growth remaining slow. Loan impairments will see a "modest further decline" and capital ratios are expected to improve.
Mr Dutton said: "It's hard to see unfettered growth at the banks when the levels of leverage are still so high."
Finally, the agency cited the Government's creation of the Independent Commission on Banking as a potential risk for the future of the banking industry. The body is due to report in September 2011. "This major policy review has uncertain, but potentially important, implications for banking industry risk," the report said.
Separately, Lloyds said it had received 288,717 complaints during the six months to the end of June, predominantly to its Lloyds TSB brand. The group only upheld 12 per cent of the banking case. Building society Nationwide also revealed it had 90,208 complaints in the six months to 4 April.