Banks’ huge profits are just a ‘blip’

“The economy may not be experiencing a V-shaped recovery,” but some banks certainly appear to be, said The Independent. Following strong results from Wall Street banks, Barclays has reported first-half profits of £3bn, 8% up on last year, while HSBC earned $5bn (£2.9bn). In each case, a jump in profits at the investment banking division offset bad debts on loans. At Barclays the bad-debt charge jumped by 86%.

 

Lloyds, meanwhile, reported a £4bn first-half loss amid an unexpectedly large impairment charge of £13bn, largely due to HBOS’s loan book. The row over bonuses has also flared up again now that staff at Barclays’ investment banking arm Barclays Capital look set to earn £200,000 each this year.

What the commentators said

Fewer competitors, low interest rates – which reduce funding costs – and the surge in bond and equity issuance are boosting investment banking. But this “trading bonanza” is likely to slow as new rivals emerge, while the supply of corporate bonds is now easing, said Jeffrey Goldfarb on Breakingviews. However, “the forces behind loan losses look more durable”.

“This is no ordinary recession,” said Patrick Jenkins in the Financial Times. Unemployment looks set to exceed 10% – some economists are pencilling in 12% – and consumer debt as a proportion of income is a record 140%. Bank lending growth to households and non-financial companies is still slowing, noted Capital Economics. With bad debts rising, banks are likely to keep hoarding cash. So a vicious circle beckons, as Ian Dey and David Smith pointed out in The Sunday Times. Anaemic lending hampers growth, so unemployment keeps rising, turning more loans bad and making banks even less inclined to lend.

 

 

One source of further losses will be credit-card debt. The International Monetary Fund expects $175bn worth of European consumer debt to go sour, much of it in Britain. The annualised rate of credit card losses is running at 9.4% of loans, from 6.4% last year. To make things worse, card debt was dished out like sub-prime mortgages, so losses will be spread around the system.

 

Meanwhile, Arturo de Frias of Evolution Securities warns that up to 10% of all mortgages could default, implying bad debts of £40bn in total. There’s also unfinished business in commercial mortgages, noted Carl Mortishead in The Times. Savills reckons that every British commercial property loan granted since 2004 is under water and rents remain depressed. So there is a long way to go before the banking sector can look forward to recovery. These profits, said Terry Smith of Tullett Prebon are “a temporary blip”.