UK banks delivered strong first-half earnings reports this week. HSBC’s pre-tax profit more than doubled to $11.1bn as bad debt provisions almost halved to $6.5bn, the lowest level since the financial crisis began. A resilient performance by its investment bank was another key boost.
Lloyds swung back into profit to the tune of £1.6bn, compared to a £4bn loss during last year’s first six months. Its first-half loan impairment charges fell by 50% and income at its retail banking division grew by a quarter. The part of Northern Rock containing the dodgy loans – the so-called ‘bad bank’, or Northern Rock Asset Management – has also swung into the black. Arrears have stabilised and loan impairments have fallen.
What the commentators said
The common feature here is the marked slowdown in bad debt provisions. This reflects the fact that interest rates are now so low that “the millions of individuals and companies with too much debt” across the industrialised world are “staving off disaster”, said David Wighton in The Times. The question is how banks cope when interest rates start to climb. “It will have to be a long and slow return to normality.”
Meantime, the bad debt problem could easily return, said Investors Chronicle. The fiscal squeeze is on the way and as the recovery loses steam concern over a double-dip is growing. Meanwhile, it’s becoming clear that Northern Rock should eventually make its owners, Britain’s taxpayers, “a tidy sum”, said David Prosser in The Independent.
There are around £50bn of mortgages in the bank and arrears are now at 5.6%. So even if these all default, there should be plenty of cash from repayments to settle the taxpayer loan of £22bn and provide a profit on top.
Lloyds, however, may be “tightening a noose around its neck”, said George Hay on Breakingviews. The strong rise in retail income, helped by moving customers onto higher mortgage rates as cheap deals expired, makes it “increasingly obvious” how dominant it is in the British market. The risk is that the recently formed banking commission will “lobby for its wings to be at least clipped”.