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BANKING – Happy surprises, unpleasant shocks – and that’s just the

A mixed bag of tricks might be the most generous epitaph for the results turned in at the half-year stage by Britain’s high street banks. On the face of it, the British banks, in reporting their figures, provided the market with about as much reliability as a British weather forecast. Focusing on the inner core of the four traditional clearers, here we have Lloyds TSB, the unfailing prototype of the bank that will always deliver value: only this time the investors’ darling announced an 11% drop in profits that wiped 7% off the share price in one day. Granted, the profit decline was mostly attributable to a one-off £400m provision to cover the cost of pensions mis-selling. But then there are those nagging issues of disappointing LDC recoveries (only six months prior to the interims Sir Brian Pitman said that he had upgraded Latin American debtors from “problem country” to “emerging country” status), worrisome results at Abbey Life; then there is that finance company in Brazil. The bank that can do no wrong seems to have hit some serious snags in the process of integrating the separate Lloyds Bank and TSB Group computer systems, a key to continued cost-cutting. And this at a time when costs are running at a disappointing 4% and the bank continues to accumulate about £2bn a year in excess capital. Lloyds TSB needs to make a big acquisition within the next 18 months or so, before its cash generating machine starts to erode returns to a degree that shareholders will find rather annoying. Pitman, ever the realist, believes the deteriorating UK economy will throw up some interesting opportunities. But it will have to be something in the insurance or mortgage lending sector because it is unlikely Lloyds TSB will be allowed to take over another domestic bank. Then there is plucky little NatWest. Just when the press and many of the analysts were queuing to shovel dirt into its grave, up it springs from its coffin waving a results statement with a totally unexpected 49% increase in half-year profits to £967m, and an annualised 18.1% return on equity that outstripped the bank’s official 17.5% target. As a result, NatWest’s shares went soaring in the opposite direction to Lloyds’, up 107p to £11.46 on the day of the announcement. Clearly people are looking for opportunities in a depressed banking sector that has been under-performing the market by about 10%. Investors are no doubt hoping NatWest may give a truer reflection of what lies ahead than some of the other banks. “This was the real upside surprise,” says John Leonard, banking analyst at Salomon Smith Barney. “At the minimum NatWest has gained six months of kinder treatment from journalists.” An intriguing question is the lesson to be learnt from Barclays. On the face of it, the bank delivered “a decent set of numbers”, according to Leonard. Headline profits were up by a mere 1% to £1.29bn, but the underlying business showed a 10% improvement and the 23% ROE was praiseworthy when measured against the domestic market, and light years ahead of any European competitor except for the Spanish. Yet the shares took a brutal hammering by investors whose nervousness, again in Leonard’s words, “probably reflects uncertainty over financials given the outlook for the British economy”. However, after all the boardroom acrimony and public humiliation involved in the sale of BZW, perhaps investors secretly hoped for a better reward from the bank that after 10 years finally seemed to have latched on to the fact that investment banks are risk-prone and retail banks are risk-adverse. It was a debilitating uphill slog for Martin Taylor to strong-arm Barclays’ board into parting with BZW – by openly placing it on the block, he accomplished two things: he forced the board into accepting a fait accompli; and he sabotaged any chance of obtaining a decent price for the unit. So hats off to Taylor for bravely giving away BZW, but one wonders if the gloss is starting to come off the chief executive whose appointment four and a half years ago prompted the City to put out bunting. This may tie in with the rumours that he is considering a departure from the bank well ahead of the 10 years he originally said he expected to remain on board. Lastly – and leaving aside the reconstructed building societies who are only passing through this incarnation as independent retail banks – we have HSBC Holdings, parent of Midland Bank. Speaking of which, profits at the jewel in HSBC’s UK crown were only one percentage point higher than Barclays’, that is, up 2%, and Midland did not go through the trauma of dumping a profitless investment bank. This was explained as “difficult trading conditions” and, as with Lloyds TSB, lower LDC debt recoveries and a provision for pensions mis-selling. There was also the added one-off cost of transferring its German investment banking operations to another part of the group. But it was the parent and its 14% decline in pre-tax profit that sent a shiver down investors’ spines, a sobering reminder of the group’s huge exposure to the Asian economic debacle. Of the four main clearers, HSBC is the one that will take a direct hit from recession on two fronts. At home, one cannot help but believe that Lloyds TSB will pull it off again and make happy bunnies of those shareholders. NatWest will probably muddle through the next downturn and its future will remain an open question as it has for the past 30-odd years. But Barclays, despite the magic lantern hocus-pocus that journalists find so irritating at the end of a marathon reporting season, looks to be very well insulated against the bad times ahead. Taylor has planned for a hard landing for the economy. In doing this he has dramatically skewed the loan book away from potential disasters such as property and construction, the recession-prone sectors which seven or so years ago cost the bank the better part of a £900m rights issue.

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