CNBC Comment: Why UK banks aren’t riding the recovery

THE TIES between Britain’s banks and its economy have always been close. But they have seemed even closer in the post-banking bailout era. On Friday, when RBS rushed out its second quarter results a week early (which was rather odd in itself – don’t companies usually only rush out results if they’re either worse than expected or leaked?), on the same day as positive GDP figures were released, it tied in with the feel-good narrative that the UK recovery is picking up steam, and that this is reflected in the country’s banking sector.

The true story is more complicated, as RBS management, to be fair, tried to point out. RBS’s success in that particular quarter was mostly down to loan loss reversals in its “bad bank.” This suggests that the better-than-forecast results have come from one off re-valuations of assets like commercial properties – and this kind of growth, as Citi analysts point out, is “not sustainable”.

While the loan loss reversals themselves point to a healthier economy and ultimately a healthier RBS (raising hopes that, one day, the UK taxpayer may recoup its investment), they are not the medicine to fix the bank’s niggling health problems.

UK banks’ relationship with the broader economy is still not entirely smooth. The slowdown in mortgage approval rates in recent months shows the caution that has crept into lending since the stricter controls of the Mortgage Market Review were introduced earlier this year. This may, ultimately, help to cool the housing market further down the line.

There is encouraging data on savings, after a raft of more competitive products were introduced – new time deposit rates have reversed their decline and have now increased for three consecutive months. Lending to businesses is also starting to show solid growth, which is hopefully a sign that the UK economy has moved towards a broader-based recovery than previous signals of a consumer spending-focused bounce suggested.

But the rest of the bank reporting season for the second quarter is likely to be muted at best. Barclays, HSBC and Standard Chartered are expected to continue to feel the effects of weak trading in their fixed-income, currency and commodities (FICC) trading divisions. And on top of its Libor fine yesterday, one-off charges for legacy issues like the PPI insurance scandal may hit Lloyds.

Barclays, HSBC and Standard Chartered have plenty of their own legacy issues to contend with. Even when FICC income starts to pick up (and some analysts are starting to forecast this might happen as soon as the next quarter), there will still be question marks over the financial impact of possible future fines from several past problems.

Catherine Boyle is a correspondent and writer for CNBC. Twitter: @cboylecnbc

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