HSBC leads expected turnaround for Britain's top banks

LONDON -- The banks that defined Britain's financial meltdown are making money again, but their profits are expected to trigger another round of bank bashing by politicians who decry a lack of business lending.

HSBC Holdings PLC, Europe's biggest bank, kicked off a week of predicted strong results from the country's main banks with first-half net income of $6.8-billion (U.S.), double the figure in the same period a year ago. Pretax profit of $11.1-billion handily beat analysts' estimates by about $2-billion, sending the shares up by 4.8 per cent.

Results from Lloyds Banking Group PLC, Northern Rock PLC, Barclays PLC, Royal Bank of Scotland and Standard Chartered PLC later in the week will confirm that a banking turnaround is firmly in place, analysts said. Andrew Lim, analyst at London's Matrix Corporate Capital, said there is no doubt the worst is over for the British banks. "Lloyds's is the one that will do the best," he said.

Lloyds, led by Eric Daniels, almost got obliterated after its purchase of rival HBOS at the height of the financial crisis in 2008, and had to be rescued by the government. The bank is expected to report a profit between £800-million ($1.3-billion Canadian) and £1-billion when it reveals interim results on Wednesday. Mr. Lim said that Mr. Daniels, who dodged an ouster attempt earlier this year, will use the results to hang onto his job.

The six banks could report collective profits of £8-billion this week, analysts said.

The compelling turnaround and rising share prices may accelerate plans by the cash-strapped British government to sell down its stakes in the banks that were rescued by the previous government.

That government took stakes in Lloyds, where it owns 41 per cent, RBS, where it owns 84 per cent, and Northern Rock, the mortgage lender that had to be outright nationalized. HSBC stayed free of government ownership, as did Barclays, which used the crisis to buy the investment banking operations of Lehman Brothers at a fire sale price. Barclays' interim profits should rise to about £3.5-billion, analysts predicted, up from £2.75-billion.

Of more pressing concern to the British government, which announced a savage austerity program shortly after its election in May, is the banks' desire, or lack thereof, to lend to small- and medium-sized businesses. Politicians have been heaping pressure on the banks to open the lending spigots.

Vince Cable, the Business Secretary in the Conservative-Liberal Democrat coalition government, has threatened the banks with extra taxes if they dole out fat management bonuses while mistreating clients. "All the evidence from business ... is that the banks are not lending as much as needed," he said.

Over the weekend, Chancellor of the Exchequer George Osborne said the banks are putting too much pressure on businesses.

"Every small- and medium-sized company that I have visited in recent weeks has had some problem with their bank," he said.

Even Mervyn King, the Governor of the Bank of England, has joined the bank-bashing brigade. Last week, he said the banks' treatment of some clients was "heartbreaking."

In their defence, the banks say their lending only reflects soft demand in a market with soft growth. Some economists think Britain's austerity program - designed to rein in one of the biggest budget deficits in the European Union - can only increase the chances of a double-dip recession, suggesting that lending to businesses is not set to rebound.

HSBC is lending less to all businesses in Britain, and overdraft usage is down considerably. But it said it approves almost 70 per cent of loan applications to all businesses, a rate that has gone unchanged in the last three years, and that new lending to small business was actually up 38 per cent in the interim period.

HSBC impressive results were in good part triggered by a turnaround in its North American operations. Pretax profit there was $492-million (U.S.), compared with a loss of $3.7-billion a year earlier. The latest figures were inflated by a drop off in bad-loan charges, which declined to $4.6-billion from $8.5-billion. The bank is running down its disastrous U.S. consumer finance division, dominated by subprime lender Household International, which it bought in 2003.

"As we focus on building a high quality asset base for the future, it is encouraging that loan impairment charges now stand at their lowest levels since the start of the financial crisis," HSBC CEO Michael Geoghegan said in a statement.

The bank said it was pleased with its investment banking results, even though the division's profits dropped 11 per cent to $5.63-billion on falling revenues. Mr. Lim, the analyst, blamed the poorer results on the climate of fear triggered by Europe's sovereign debt crisis. He said he didn't think market sentiment about indebtedness and possible sovereign defaults would improve in the second half of the year.

Asia was the star performer in HSBC's portfolio. Pretax profit in Hong Kong and the Asia Pacific area was up 30 per cent, to $5.9-billion. In Europe, profits rose only 18 per cent, to $3.5-billion, as the biggest economies put the worst of the recession behind them.

Mr. Geoghegan, who is based in Hong Kong (where HSBC began in 1865 as Hongkong and Shanghai Banking Corp.), said he is "bullish" on emerging economies.

But he said he expects overall global growth to remain constrained because of "anemic" growth in the Western countries.

HSBC HOLDINGS (HSBA)

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