UK Banks Post Encouraging Profits ? But At Whose Cost?


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In August each year UK banks publish their reports on the first half of the year. Between them, Britain?s five biggest banks reported over ?15 billion in pre-tax profits for the first six months

In August each year UK banks publish their reports on the first half of the year. Between them, Britain?s five biggest banks reported over ?15 billion in pre-tax profits for the first six months of the year. This is good news for shareholders and the markets in general. It?s good news for British taxpayers who are propping up banks to the tune of around ?1 trillion. Unfortunately it?s unlikely to make any difference to savers who will probably keep receiving a pittance in interest in spite of having helped the banks back to profit.

Most analysts had expected lower profits, particularly since banks generally struggle to improve profitability when interest rates are low. However, their current approach of paying savers low returns at the same time as charging borrowers inflated interest rates would appear to be serving the banks very well.

Lloyds Banking Group

Lloyds, which is 41% state owned, reported a pre tax profit of ?1.6 billion for the period, compared to a loss of ?4 billion last year. The profit was double what most analysts had expected, with some now predicting annual profits of ?4 billion.

The bank?s Tier 1 capital ratio ? a key measure of financial strength ? is 10.3%. The EU regulatory minimum is 4%, while for the recent EU stress tests it was set at 6%.

The chief executive of Lloyds Banking Group, Eric Daniels, called the first half of 2010 a ?significant milestone? for the group. He said:

?Given the business model that we have established, coupled with the gradual recovery in economic growth in the UK, we continue to believe that the group is well positioned to deliver a strong financial performance over the coming year.?

Royal Bank of Scotland

RBS reported pre-tax profits of ?1.14 billion, up from ?15 million a year ago. The group made an operating profit of ?1.58 billion, compared to a loss of ?3.35 billion last year.

Its Tier 1 capital ratio stands at 10.5%.

Its chief executive, Stephen Hester, acknowledged that the bank had only ?broke even? as its net profit was ?9 million after an unusually large tax bill of ?931 million. It was still an improvement on the ?1.04 billion net loss a year previously however, and its first net profit since 2007.

Hester was cautious about the effect of the global economy on business over the next year, but he is happy with the progress so far and optimistic on the bank?s five year turnaround plan. ?The rebuilding of RBS is a marathon not a sprint?, he said.

The bank is on course to exit the UK government?s Asset Protection Scheme in 2012. The start of the sale of the state?s 84% holding would be beneficial for both the bank and the wider economy, Hester said.


Unlike Lloyds and RBS, HSBC survived the financial crisis without receiving any direct government support and has now posted a healthy pre-tax profit of ?7.1 billion for the first half of the year. This was an increase of 121% from the same period in 2009.

Its Tier 1 capital ratio is 11.5%.

HSBC banking group made gains in every region except North America, with the strongest growth coming from Asia where lending grew by 15%. Just over half the profits came from investment banking.

Banking analysts welcomed the results, but warned that the recovery in the US business still depends on the continued improvement in the US housing market and pointed out that while the percentage improvement in profits looks impressive, much of this is because last year was so bad. Numbers are not yet back to 2008 or even 2005 levels.


Barclays reported a ?3.95 billion pre-tax profit, up 44% last year.

Its Tier 1 capital ratio is 13.2%.

Performance was boosted by a sharp drop in bad debts, though the bulk of the profits came from its investment banking arm Barclays Capital which made ?3.4 billion ? a 225% rise in profits.

Chief executive John Varley hailed the bank?s performance, but also cautioned that ?although there is light at the end of the tunnel, it is clear we are still in the tunnel, so we must remain vigilant?.

Earning profits

While a drop in bad debts has helped banks recover, the improvement in Lloyds and RBS? net interest margin ? the difference between what they receive from borrowers and pay out to savers, expressed as a percentage of interest-bearing assets, ? was a significant boost to their profits. Banks have arguably been able to post massive profits to the detriment of savers and borrowers. While savers generally only receive a little over the Bank of England base rate ? often not even enough to keep up with inflation ? borrowers are paying many multiple of times in excess of the rates that banks borrow at. This seems particularly unfair on British taxpayers since if it wasn?t for government loans and guarantees banks may not be back in profit today ? indeed some may not even exist anymore.

In an article written in mid-July (so before the profits had yet been announced), the Daily Mail City Editor Alex Brummer, complained:

?In the race to return to profits and strengthen their balance sheets, the high street banks look to have forgotten a basic principle: they are there to service customers and clients, and should not be in some mad race to stoke up earnings, salaries and staff bonuses at the expense of those of us who entrust them with our money.

?Instead of winning back confidence by treating the customer well, they are ratcheting up interest charges to loyal clients, paying savers a pittance on their hard-earned nest eggs and treating Britain's entrepreneurs – on whom our future prosperity depends – like recalcitrant schoolchildren who need fierce discipline.?

There will be plenty of savers and borrowers who agree with these sentiments.

If you would like your capital to work for you, rather than for the banks, ask an experienced and qualified wealth manager like Blevins Franks to discuss alternatives based on your circumstances, objectives and risk profile.

By Bill Blevins, Managing Director, Blevins Franks

13th August 2010

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