Tense wait for UK banks' results

Kevin Peachey
Business reporter, BBC News

Banks results season gets into its stride in the coming days

Has a gloom settled over the UK banking sector, or will the results season disperse the clouds hanging over Canary Wharf?

The banking sector will be reporting profits in the coming days, starting with Barclays on Tuesday and followed later in the week by Alliance and Leicester and Lloyds TSB.

Hefty writedowns are expected, with the High Street giants revealing their provisions to cover losses from the collapse in credit markets and bad debts as borrowers default on loans.

This will be the first set of audited results since the credit squeeze that tripped up Northern Rock took hold last summer.

The mood is nervous at best, but according to some analysts, it is at its lowest ebb for more than a decade.

The most rosy outlook is that with all the bad news out in the open, the results should help lift the gloom and banks should soon be back to business as usual.

Temporary relief

Reports at the weekend suggest that Barclays and Lloyds TSB will boost the financial sector by increasing their dividend payments to shareholders.

The nightmare scenario is that the credit crisis mixes with an economic downturn and it is time to brace for a recession.

Banking analyst Julian Skan, of Accenture, predicts that the profit results will not be too bad, especially when the "exceptional losses" are stripped out.

The reporting schedule includes: Barclays - Tuesday 19 February Alliance and Leicester - Wednesday 20 February Lloyds TSB - Friday 22 February Halifax Bank of Scotland - Wednesday 27 February Royal Bank of Scotland - Thursday 28 February HSBC - Monday 3 March

He estimates that losses from the credit crisis will wipe out 20% to 30% of profit, but owing mainly to exposure to debt outside the UK market.

But he says the good vibrations will only be temporary, with concerns over growth prospects set to cause spirits to fall in two or three months.

"Raising the dividend will keep shareholders happy, but the overriding thing to come through in six months is the lack of growth options in the UK," he says.

Opening tremor

The first shock for investors came last week when Bradford and Bingley reported a sharp fall in profits.

Pre-tax profit almost halved to £126m in 2007 from £246.7m the year before, after the bank wrote down assets including those tied to US mortgages.

"There is no denying that today's market circumstances present the mortgage industry with a unique set of challenges and opportunities," B said.

The firm's shares plummeted 23% in one day after the results came in.

Overseas markets

Mervyn King, the governor of the Bank of England, has called on the banks to be clear about the extent of any losses, and move quickly to restore their capital position.

Barclays is the first major high street bank to report

UK banks underperformed the FTSE by 29% from January 2007 to February 2008. There was also dramatically increased volatility in the sector as uncertainty magnified the impact of good and bad news.

"Short term, the prospect of dividend payments, reassurance from management teams and increasing clarity over writedowns should lend some support to the sector," says James Hutson, analyst at Keefe, Bruyette and Woods.

"Longer term, we think there is more risk surrounding the outlook for earnings than at any time in the last 10 years," he says.

"The suggestion is that banks are going to have to look to overseas markets for future growth."

Banks such as Barclays, HSBC and RBS, which have already gone global, could extend this market and might be followed to high-population markets such as Indonesia and Malaysia by other UK banks.

But, according to Mr Skan, they would also need a strategy for dealing with any bad debt they might encounter in these new international markets.

Customer perception

Banks are facing a challenge from two fronts.

The credit crunch has undermined banks growth, and consumers have a perception of excess profits - especially with the recently completed High Court hearing on overdraft charges.

Mr Skan believes that over the next year there is likely to be a shift to more visible charging by banks, for example a £10 monthly fee for a banking product.

This would have to be done without adding significantly to the numbers of financially excluded people.

It should also see a debate over the future of some socially-sensitive products.

"There are too many banking products around," he says.

"The challenge is getting rid of some of these, such as cheque guarantee cards and 1p and 2p pieces."