Banks back in profit, but how?

Britain’s biggest banks have all skyrocketed back into the black this week with profitable results for the first time in two years.

Between the major players, HSBC, Barclays and Lloyds Banking Group they have netted a profit totalling £15 billion for the first quarter of 2010. And considering this time last year they were plunging deeper and deeper into the red with taxpayer backed bailouts for Lloyds and RBS, making any profit, let alone billions of pounds worth may seem like a small miracle.

So how did they do it? And was it at the cost of the taxpayer once again?

Bad loans

All of the banks said they had found a reduction in the number of bad debts helped bring them back into profit.

Lloyds said it more than halved its bad debts, which had brought the group to its knees during the financial crisis.

In 2009 the bank was £4 billion in debt following its disastrous acquisition of struggling bank HBOS. But on Monday it reported a profit of £1.65 billion.

And according to HSBC their fortunes were a result of a reduction in bad loans and an increase in lending, netting them the biggest profit of the week at £7 billion. The bank was also in a better position than its counterparts because it emerged from the financial crisis with no Government support.

Barclays also profited without Government bail outs with a profit of £3.4 billion. Barclays' rise is said to have been boosted by its investment banking division Barclays Capital.

RBS came in at the bottom of the banks scraping back to profit with a £9 million result. Still, it marks a vast improvement on the £24 billion loss seen in 2009 – the biggest in corporate history. Again, they put their reversal in fortunes down to a reduction in bad loans.

In a nutshell the banks found that for the first half of this year less people were defaulting on loan repayments, something that has kept them in debt for the past two years.

Job losses

Despite the good news the profits also came at a cost – thousands of jobs.

Lloyds admitted that funding costs fell as a result of the credit crunch because around 16,000 Lloyds employees lost their jobs.

And RBS was able to recover after shedding 23,000 jobs worldwide.

What next ?

Last week’s good news may have slightly lifted the markets and boosted investors’ confidence but experts are warning that it’s still too early to assume that Britain is back on its feet.

In fact the banks profits are only as a result of ‘declines in credit losses’ according to Robert law, analyst with Nomura.

And there’s still a long way to go with an estimated figure of £450bn needed in order to refinance between now and 2012.

Even Business Secretary Vince Cable has warned against any over excitement about the better than expected results from the banks.

He said: "At the moment the great danger is that recovery is choked off by a lack of funds. The other issue is about the structure. The view that some of us take is that the big banks are structurally dangerous."

© Fair Investment Company Ltd
 

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