A downbeat report from the Royal Bank of Scotland PLC on today clouded a week of earnings updates that started with suggestions that the country's lenders were over the worst of the financial crisis — almost exactly two years after the credit squeeze took hold.
While
HSBC and
Barclays shrugged off the near-collapse of the system to report substantial profits and fuel talk of financial recovery at the start of the week, losses and bad debt writedowns at part-nationalized RBS and Lloyds have tempered the optimism in London's financial district.
"After an extremely promising start, the half-time banking reporting season has ended in some ignominy," said Hargreaves Lansdown head of equities Richard Hunter.
RBS, which is 70 percent owned by the taxpayer after being bailed out by the government last year, spooked investors by reporting that bad debts jumped to 7.5 billion pounds ($12.6 billion) and declining to speculate whether that would be the peak on impairment charges.
The bank's first half net loss widened to 1.04 billion pounds ($1.7 billion) from 827 million pounds a year ago as sluggish activity in its retail and corporate businesses wiped out strong gains in investment banking.
Chief Executive Stephen Hester's refusal to say when bad debt charges would peak contrasted with fellow bailout recipient Lloyds Banking Group PLC, which said its loan impairments had likely peaked after jumping to 13.4 billion in the first half.
Hester dismayed stock markets by saying that overall results at the bank, Britain's biggest in terms of assets, may not substantially improve until 2011 and full recovery "will take time," leading to a 14 percent drop in the bank's share price.
Charles Stanley analyst Nic Clarke said that RBS' "realism when it comes to the scale of the task that they face," should be appreciated, in contrast to the outlook presented by Lloyds, "which we felt were too optimistic."
Lloyds, which is 43 percent owned by the government, reported a smaller-than-expected first half loss of 3.1 billion pounds ($5.3 billion) for the first half of the year as it declared its belief that the worst was over.
NCB Group analyst Simon Willis supported the cautious view on the economy, saying that there is a good chance next year of the second half a so-called double-dip — when a nascent recovery sputters out and turns into another
recession.
"The main driver will be unemployment which continues to rise and has lead to higher underlying impairments," said Willis. "Unemployment is key driver for bad debts on the personal side, whilst on the corporate side there is a peak in corporate insolvency which has a knock on effect on unemployment."
The Bank of England underscored the jittery mood when it surprised markets on Thursday by significantly expanding its program of buying up assets to boost the money supply. The central bank's decision to expand its so-called quantitative easing program by 50 billion pounds ($84 billion) to 175 billion pounds ($295 billion) indicated it too remains cautious about early signs of economic recovery.
But the week's banking earnings could also be seen as a polarization of the sector, with
HSBC and
Barclays — which did not resort to a government bailout — shrugging off the near collapse of the system to report combined profits of more than 5 billion pounds ($8.4 billion).
The
Barclays and
HSBC earns fueled talk of financial recovery — as well as raising fears of a return of the banking bonus culture — and sparked an across-the-board rise in banking stocks.
While both banks also recorded higher impairment charges for bad loans, they also doubled their profits in investment banking, gaining from a recent rise in share markets around the world.
HSBC Chairman Stephen Green was notably upbeat, in sharp contrast to RBS' Hester, suggesting "we may have passed, or are about to pass, the bottom of the cycle in the financial markets."
The positioning of the four major banks was reflected in their share prices on Friday, with Lloyds following RBS lower, losing 4.5 percent, while
HSBC dipped 0.8 percent and
Barclays rose 2.3 percent.
