With the IMF forecasting that the UK's economy will grow at 3.2 per cent this year - compared with a mere 1.1 per cent for the eurozone - investors may have assumed that the good times have returned for the UK's banks. But with the big lenders having now reported their half-year figures, it's clear that plenty of headwinds remain.
Certainly, economic recovery is bringing with it much improved credit quality. Indeed, RBS (RBS) slashed its group bad debt charge to £269m at end-June from a rather heftier £2.15bn a year earlier, helped by a substantial improvement at its Ulster bank unit. And while RBS's credit quality recovery is perhaps the most dramatic in the sector, nearly all of the lenders had good news to report. Lloyds' (LLOY) half-year bad debt charge, for example, fell two-thirds, HSBC's (HSBA) dropped 41 per cent, and Barclays' (BARC) was a third lower. Only Standard Chartered (STAN) saw its impairment charge rise - reflecting well-flagged credit quality issues at its South Korean operations. The lenders also generally reported robust-looking capital ratios - so fears for capital adequacy now look unjustified.
But offsetting the earnings boost from lower bad debts is what RBS's chief executive Ross McEwan has described as "a slate of legacy issues". Significantly, that includes persistent misconduct-related costs. Provisions for PPI-related compensation, for example, continue to rise: Barclays's charge rose by a painful £900m at the half-year stage, RBS's increased by £150m, Lloyds' jumped another £600m, and HSBC's rose $234m (£139m). Provisions for mis-selling interest rate products are also on the rise - RBS's provision here, for example, rose another £100m in the first half - and misconduct-related fines continue to be levied.
Lloyds was fined £226m for its role in Libor-rigging and for manipulating the fees paid by the bank for government-backed funding during the financial crisis. Standard Chartered could be facing more regulatory action, too, for further sanctions failings - the bank was fined $667m in 2012 for Iran-related sanction violations. While the New York Attorney General filed a lawsuit against Barclays in June relating to the bank's 'dark pool' trading operations. Dark trading allows for blocks of shares to be traded while keeping prices private, and it's alleged that Barclays favoured higher-frequency trading clients.
A better economy hasn't helped investment banking divisions, either. That's down to persistently low levels of market volatility, along with regulatory moves - such as the Volcker Rule in the US - that are designed to reduce risk-taking; both are hitting trading levels. Indeed, analyst Matt Spick of Deutsche Bank has noted that fixed income, currencies and commodities-related business were "the weakest area[s]" for banks during July with "FX and rates volatility declining again". Reflecting such pressures, HSBC's global banking & market unit (essentially investment banking) saw income fall 8 per cent at the half-year stage, while Barclays' income from such activities dropped 18 per cent. Barclays' performance, however, also reflects restructuring efforts: it's in the process of substantially downsizing its investment banking arm to focus on its UK retail, corporate and African operations.
As the established lenders struggle, a reborn TSB (TSB) has quietly emerged as a serious challenger. Lloyds floated 35 per cent of TSB in June in response to demands by EU competition regulators. The bank was forced to hive-off 631 branches as the price for state support during the financial crisis. The mortgage-focused lender has no investment banking exposure, but was born with a branch network that comprises 6 per cent of the UK's total bank branches - so it's hardly sub-scale. Moreover, its maiden half-year results last month revealed that it has made a robust start: its market share for new account openings, for example, swelled to 9.2 per cent - well ahead of its 6 per cent target. "The UK's seventh-largest bank used high interest rates, aggressive marketing and promotions," explained broker BTIG. TSB plans to grow it loan book by 40-50 per cent by 2017.
