Banking Sector results offer mixed news for investors, taxpayers and customers

Royal Bank Of Scotland Group Plc (LON:RBS) wrapped up a week of impressive half-year banking results on Friday with news that the 84% taxpayer-owned group had made pre-tax profits of £1.14bn during the period. The figures followed expectation-beating results from the bank’s main rivals, including HSBC Hldgs (LON:HSBA), which doubled profits to $11.1bn, indicating that loan impairment charges of $7.5bn were the lowest since the start of the financial crisis. Barclays (LON:BARC) reported gross profit before tax up 44% to £3.95bn. Its impairment charges were down 32% to £3.08bn. Lloyds Banking Group (LON:LLOY) also scrambled its way out of the red, with profits of £1.6bn driven by revenue growth, lower costs and a significant reduction in impairment. 

The results were welcomed by investors, with shares in all the main groups rising during the week. Arturo De Frias Marques at broker Evolution Securities maintained a “sell” stance on Barclays, claiming the stock looked fully valued, but otherwise reiterated a strong preference for Lloyds, Standard Chartered and RBS and said he was “very positive” on UK banks, with Barclays being the only “sell” in the space currently.

Taxpayers also started to look less exposed to the multi-billion pound bail out by the UK Government of certain banks during 2009, although some analysts remained sceptical. Professor Michael Ben-Gad, Head of Economics at City University London, said: “The fact that the RBS is no longer losing money reflects the overall recovery of the banking sector. Of course many will argue that these results demonstrate that the decision to invest £45bn was money well spent. I would suggest that beyond the serious problems of moral hazard that the bail out created, the money the government borrowed to bail out the bank helped generate the deficit crisis.”

Prof Ben-Gad also noted that UK taxpayers remain on the hook for £282bn in risky loans that the bank moved into the government's insurance scheme, which includes nearly all the first £60bn that RBS is theoretically responsible for itself. “Hence, since the UK government in effect indemnified RBS creditors, UK public finances face at least some risk should real estate prices (for example) in any parts of the world where RBS invested take a serious tumble,” he said. 

Elsewhere, the banking results also served to sharpen the focus on whether the country’s main lenders are doing enough to support business growth by lending sufficient cash to small firms. The Government doesn’t think they are. The banks disagree.

In a June speech at Cass Business School, Business Secretary Vince Cable said the new coalition Government had three priorities for the banking industry, including the possibility of structural reform - separating retail and investment banking; implementing a levy on banks and, finally, making sure that taxpayer-funded banks were adequately supporting smaller companies. He said: “We do not expect to see viable businesses deprived of credit or working capital by banks that are largely owned by the taxpayer, or the general beneficiaries of wider public support. The banks claim that there is no demand. That is not right. If the bar is set too high, of course no one is willing to jump. The current risk aversion by banks in the SME sector will stifle recovery and, if it does, will actually rebound on the banks through bad debt.”

Responding this week, Angela Knight, the chief executive of the British Bankers Association, said banks were well aware of their responsibility to society and their commitment to support the economy by lending to individuals and firms. “The return of profitability to the banking sector is a positive sign and indicates that the sector is helping the UK economy move out of recession,” she said. Knight insisted that banks had made repeated commitments to support business. “There are funds available to lend to firms with a viable business plan. “But the industry's ability to support the economy needs to be considered as the increased capital and cash we are required to hold cannot both be set aside and used to finance lending.”