Rocky outlook for banks

19 August 2009

Shareholders should brace themselves for more weak banking results as rising impairment charges are set to hit profitability, according to KPMG.
The firm's UK banks performance benchmarking survey reports that bad loans, tough competition in the savings market and the increased cost of wholesale funding will take their toll on retail profits at big banks such as Lloyds Banking Group , Royal Bank of Scotland (RBS), HSBC and Barclays in the second half of the year.
Furthermore, investment banking profits are likely to drop as revenue from selling and trading loans and bonds falls. Profits from these divisions had offset the rising cost of writedowns in the first six months of 2009 when Barclays, HSBC and RBS surprised the market with better-than-expected results. 
“Three of the big four banks reported a profit despite the recession, but underlying this is a continued, and significant, increase in impairments,” the report says.
While Lloyds was confident its bad debts had peaked in the first half at £13.4 billion, other banks, including RBS, have said it is too soon to call an end to the financial turbulence.
Barclays, Lloyds and RBS all saw their retail operations turn a profit in the first six months of the year, albeit at much lower levels than in previous years. However, rising impairments and the impact of the overdraft test case going through the courts could turn their retail businesses loss-making in the coming months.
The KPMG report states:  “Retail banking is still just profitable at lower levels, but with rising impairments. It seems probable that it will fall into loss making in the second half of this year. It is expected that a high level of impairment is likely to continue for the foreseeable future.”
It warns that losses from bad loans will not peak until 2010 or beyond amid rising defaults on unsecured loans and credit cards. The outlook for the housing market also remains uncertain with potentially more bad debts creeping into the equation as unemployment increases further.
"Overall, mortgage provisions will be a key uncertainty for retail banks for the foreseeable future," the survey said.   
For the six months to 30 June, HSBC’s UK personal financial services division saw profits slump to £138 million from £782 million for June 2008. Barclays reported a pre-tax profit of £268 million for the same period, down from £690 million for the year ended 30 June 2008.
RBS reported an operating income of £53 million for the six months compared with £514 million the previous year while Lloyds reported a proforma profit before tax of £360 million – significantly less than the £1.7 billion posted for the half year ended 30 June 2008.

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