The Royal Bank of Scotland Group reported a pre-tax profit of £15m today for the first six months of the year, but this was transformed into a £1 bn loss after paying tax and dividends to the UK government, which owns 70 per cent of the group following its rescue last year. In keeping with earlier results announced by HSBC and Barclays, the investment banking arm of RBS did well, registering a £5 bn profit, but unlike their rivals adverse conditions in retail banking and a £7.5 bn write down for bad debts, dragged the Royal bank down into a loss. Lloyds Banking Group also reported its results this week and its lack of an investment banking arm meant that profits there were extremely scarce and the Lloyds’ lost £4 bn, mainly down to its takeover of HBOS’ last year.
The £4 bn loss at Lloyds Banking Group for the first half of 2009 was attributable in large part to more than £13 bn of bad loans and investments, the vast majority of which were undertaken by HBOS before Lloyds’ takeover. How the bank must now be regretting its rescue of Halifax Bank of Scotland last year, although I’m sure that the senior management there are still fixed on the long-term benefits of owning the largest high street bank and mortgage lender in the UK. A lot of efficiency savings though - and lost jobs - will need to be enforced before the Group turns around its performance. However, Lloyds did predict that its write downs of bad debts would be much smaller in future, leading to a double-digit rise in its share price and a rosier outlook for 2010. Most of the bad debts will be transferred to the UK government’s bad debt insurance programme however, known as the Asset Protection Scheme (APS), so the taxpayer will potentially be liable for any future losses from HBOS bad debts, probably also triggering an increase in the taxpayers’ 43% stake in Lloyds.
Over at RBS, the government’s APS insurance programme will also ride to the rescue in future years, hopefully allowing the bank to draw a line over its disastrous decision to buy ABN Amro bank, and all its bad debts, at the top of the market in 2007. New chief executive Stephen Hester did however warn that “recovery will take time” and predicted that results may not substantially improve until 2011.
In other news, Northern Rock’s losses grew by 24% in the first six months of 2009, reaching £724m compared to £585m last year. The nationalised bank admitted that almost 4% of its mortgages were more than three months in arrears, considerably above the national average of 2.39%. It now owes the UK government £10.9 bn. The Swiss banking giant, UBS, reported a Q2 loss of 1.4 bn swiss francs (£790 bn) for April to June, following its loss of 2 bn swiss francs in Q1 of this year. Its been badly hit by massive losses in the US sub-prime mortgage market, unlike its rival Credit Suisse, Switzerland’s second-biggest bank, which reported second quarter profits of 1.57 bn swiss francs (£880m), up 29%. French bank BNP Paribas also posted a healthy EUR1.6 bn profit (£1.36 bn) for Q2, while country rival, Société Générale made EUR309m (£263m), but this was a halving of its profits against the same time last year, which was largely down to a EUR1.1bn provision for bad debts.
The reporting season has shown that there is now light at the end of the recessionary tunnel for the banking industry, especially for those businesses that own investment banking arms where there is now less competition after the fall of Lehmans and others, but much of the boost has been from government stimulus packages and a return to the old risky trading practices on the wholesale markets is unlikely to be accepted by public and politicians alike. The recovery is fragile, and yet to reach the wider economy, so any excessive optimism at this point would be unwise. The recent decision by the US House of Representatives to pass legislation barring excessive bonuses for Wall Street bankers shows the tenor of the public mood at the moment. Combined with worries about a lack of lending to small businesses, the banking industry would be wise to be flexible in its strategic moves and public utterances.