Surprise results signal positive outlook for UK banks

Britain’s four big banks last week announced results for the first half of the year, which were well ahead of consensus forecasts.

But analysts, such as Jane ­Coffey, the head of equities at Royal London Asset Management, say much of the improvement came from accounting conventions, such as adjustments for value of debt, rather than from underlying cash generation.

However, British banks have improved, mainly as a result of a sharp fall in bad debt provisions. At Lloyds and HSBC provisions fell by more than 50%. Meanwhile, Lloyds and RBS also enjoyed improvements in their net interest margins.

Margins of those banks that largely financed their lending from their deposit base, such as HSBC, remained under pressure as interest rates remained at a record low.

For HSBC, with its global reach, it is difficult to discern specific trends, but in general the quality of its assets improved while demand for credit in the developed countries stayed low.

Britain’s banking system has been recovering, although the economic environment is still challenging.

George Barrow, an investment analyst at HIM Capital, says Lloyds is the “pick of the bunch” – the quality of its assets improved, provision on the wholesale side turned around and the ratio of non-performing loans fell. (article continues below)

In acquiring HBOS, Lloyds took on high-risk loans. Barrow says analysts were concerned these would drag it down, but Lloyds is returning to ­stability.

Barclays’ performance in Britain was not as strong, having been mainly driven by BarCap, its investment banking arm, which generated 85% of group profit. BarCap’s performance offset pressures seen in Barclays’ western European operations.

The biggest recovery was by RBS. “At RBS there is a lot of noise on fair value gains on debt,” Barrow says. Its British retail division is resilient: RBS shows positive margin trends and its consumer book is improving.

Relatively positive results of the stress tests for top European banks and a watering down of the Basel III capital requirements also helped to reduce investor anxiety.