Outlook: Banking

Outlook: Banking

WITH DON Cruickshank breathing down their necks this is not the best of times for the banks to be unveiling bumper profits. But the big lenders are still in a state of blissful denial, at least as far as the activities of Mr Cruickshank's Banking Review team are concerned.

After Lloyds-TSB's 16 per cent jump in half-year profits on Friday, it was the turn yesterday of HSBC to prove the middle-aged scribblers wrong by coming out with interim numbers that surprised on the upside. Since NatWest, which reports today, will not want to be outdone by Barclays, and since Barclays will be keen to demonstrate that eight months without a chief executive has not wrecked the balance sheet, it is reasonable to suspect that the analysts are in for a few more surprises.

The banking chief executives are, of course, all busily ascribing this happy state of affairs to their own innate brilliance, when in fact it is the benign economic backdrop which has made it so much easier for them to make money out of money.

With fierce competition eroding margins in most sectors, the average industrialist would kill for the double-digit returns on equity being achieved year after year by the banks. Lloyds TSB managed more than 30 per cent in the first-half, providing services which are largely identical to those offered by practically every other bank the world over, while even Midland which had to be bailed out by HSBC in 1982, is making 27 per cent ROE. Those by any standards are not normal returns. Most European not to mention US banks struggle to come anywhere near. British banks may genuinely be far superior to everyone else. But given the complete hash they have made of investment banking and - with the exception of HSBC, which started out as an overseas - the miserable failure of their attempts to expand abroad, their managements are far from infallible. The banking market here is more competitive than in many comparable economies, which just shows what strides in efficiency the industry has made to be achieving the returns that it is. But the banks are still making money hand over fist and if Cruickshank squeezes their pips, there will be little sympathy in most quarters.