Banks to report bumper profits as bad loans fall

Britain’s banking sector will attempt to dispel the clouds surrounding it and show that it isn’t only Royal Bank of Scotland that is benefiting from the economic recovery as the reporting season gets into full swing this week.

Barclays is expected to report adjusted pre-tax profits of £3.4bn on Wednesday, while Lloyds will follow on Thursday with underlying pre-tax profits expected to come in at £3.5bn.

The huge profits will come less than a week after the Office for National Statistics said the economy has finally grown beyond the pre-crisis peak in 2007.

It follows Royal Bank of Scotland’s surprise Friday announcement that it would shatter analysts’ forecasts by reporting £2.6bn of pre-tax profits in the first half, as Britain’s improving economy led to a sharp fall in bad loans.

Barclays is battling to clear its name after accusations by the New York attorney general that it misled customers using its dark pool share trading facility into believing they would be protected from predatory high frequency traders. It has opted to fight rather than settle fraud charges, and filed a motion to dismiss the lawsuit last week, claiming the attorney-general, Elliot Schneider, had overreached himself and could not prove that the bank had actually harmed anyone.

Lloyds is also facing regulatory woes, with the bank expected to settle its involvement with the Libor interest-rate fixing scandal early this week, probably ahead of Thursday’s results. The bank is expected to pay a fine of £200m to £300m, clearing one of the major uncertainties that could have complicated plans to further sell down the state’s holding, now just below a quarter of the bank’s shares.

HSBC will be the last of the big four to report on Monday next week, with weakness in its Latin American business and competition from UK rivals making a push to compete harder in the mortgage market set to depress results. Its executives will be in Hong Kong for the interim results, where they will be hoping for an easier ride than they might get in the UK.

The looming foreign exchange trading scandal has weighed over the entire sector in recent weeks and while banking shares finished last week with a flourish thanks to RBS, it continues to shred nerves.

A multinational team of regulators is investigating allegations of sharp practice in the £3 trillion London-based market, and some 40 traders from various banks have either been fired, suspended or placed on leave.