If Lloyds is now calling the turn in the cycle, the consequences could be significant. Against the background of sluggish loan demand as the UK clawed itself out of recession, the banks' profits have only moved forward over the past few years as a result of a steady reduction in previously mountainous bad debts.
There are other signs that the climate is getting tougher for banks. Company receiverships, which have been on a downward trend since the end of 1991, have levelled off and may now be rising. Figures from Touche Ross show the average is up from 157 a month in the second half of last year to 177 in the first half of 1995.
There is little solace at the other end of the corporate scale, where competition is intense. The Bank of England warned earlier this year that lending margins for large corporate borrowers are now at their lowest level since 1989, just ahead of the last recession. The clear worry is that banks may be making the same mistakes of the past, when underpricing of loans to poor credit risks at the height of the boom led to the bad debt overhang from which the sector is only now recovering.
Other jitters concern the pounds 4.4bn of acquisitions that banks have made in the past 18 months or so. The record is not good on this front, given British banks' narrow avoidance of disaster in the US in the 1980s. The latest deals range from a clutch of New England regional banks by the Royal Bank to Lloyds' pounds 1.8bn takeover of the Cheltenham & Gloucester Building Society.
They are a lot less adventurous than in the past, but even if they do not themselves go wrong, the effect will be to curtail severely the build- up of surplus capital which has been a feature of the last few years. This restraint has come as the sector faces a problem with dividend cover. Double-digit growth in distributions since 1993 has run ahead of earnings. It is not at all clear how long such largesse can be maintained.
Admittedly, Lloyds' move on general provisions has come at a particularly opportune moment, helping to smooth profits which would otherwise have been inflated by pounds 193m disposal profits on stakes in 3i and Standard Chartered. Meantime, specific provisions have continued to fall and domestic interest margins have grown by nearly a tenth of a point to just over 4 per cent, helped by the lack of any need to scramble for deposits.
Since April 1992, bank shares have outperformed the rest of the market by nearly 65 per cent. The cycle may not have turned yet, but it cannot be too far off. In the meantime, investors should not expect the same sort of handsome returns to which they have become accustomed.
Grosvenor bets on breezy bars
Doubled full-year profits from Grosvenor Inns, the Slug and Lettuce pub chain, showed what a lucrative business the new breed of bright and breezy urban bars can be. There may still be too many pubs in Britain but with the vast majority still dingy boozers, there is plenty of scope for profitable expansion of chains with the right formula.
Grosvenor is expanding at a steady pace, bringing its total to 46 by the May year-end, putting it neck and neck with another recently quoted pub owner, Regent Inns. It will add six more this year.
The comparison with Regent is interesting because both operate principally in the South-east, are aimed at affluent twenty and thirtysomethings and have a range of formats.
As well as the Slug & Lettuce pubs, Grosvenor operates brewery/pubs under the Hedgehog and Hogshead name and has set up a small chain of upmarket watering holes called Bar Central.
The biggest difference between Grosvenor and Regent, however, is in their profitability. In the year to May, Grosvenor made pounds 1.6m pre-tax from sales of pounds 14.6m. That compared with pounds 853,000 from sales of pounds 10.5m last year but was a lot less impressive than Regent's most recent figures, showing profits of pounds 2.3m from sales of pounds 15.3m. Regent could make as much as pounds 4m when it announces on Monday.
One of the reasons for Grosvenor's underperformance may be the relative focus on drinks at the expense of food, which is often the best margin business in pubs and bars. More than 90 per cent of Grosvenor's business is drinks, although food is growing much faster and the margin it produces is widening even more quickly.
Plainly, there is plenty of work still to do to bring returns up to Regent's level, but with the full impact of the rebranding of the Slug and Lettuce chain still to come through and a number of the old, less profitable taverns still to be replaced, that should be achievable.
Analysts reckon profits should exceed pounds 2m this time, putting the shares on a prospective p/e of 17. That is pretty demanding, but the company has an impressive record since floating three years ago, having outstripped the rest of the market by a sizeable margin. With good cash flow and plenty of borrowing headroom to fund more expansion, the shares still look reasonable value.Reuse content