Dramatic recovery for Britain's banks

BANKS will come under renewed pressure to extend credit to small businesses this week as the UK’s five largest lenders reveal combined pre-tax profits of nearly £12bn.

With the stronger players returning to pre-financial crisis levels of success, a fresh row is brewing between politicians – who are demanding more finance for enterprises – and bank executives, who say they need to build up their capital positions.

In a remarkable bounce-back from the lows of the financial crisis, state-owned Lloyds Banking Group and Royal Bank of Scotland are expected to report a return to profitability for the first half of the year.

Lloyds, 41 per cent backed by the taxpayer, will achieve a profit of around £800m in the six months to June compared with a £4bn loss at the same point in 2009. Analysts say the dramatic turnaround is due to a sharp fall in toxic write-downs related to the takeover of Halifax Bank of Scotland and a re-rating of the value of Lloyds’ large mortgage portfolio.

Execution Noble said Lloyds would be able to resume strong dividend payments when the European Union’s restrictions on state-supported banks are lifted in 2012.

RBS, 83 per cent government-owned, is forecast to hit a slimmer profit of around £120m after bleeding £1bn last year. Although the Scottish bank’s high street operations are recovering, it is still experiencing trouble from non-core units. RBS is expected to announce the sale of 318 bank branches to Santander for £1.7bn ahead of its interim results.

HSBC, which reports this morning, is on track for a significant leap in profits from $5bn (£3.5bn) to $8.6bn. Barclays is expected to grow its profits from £2.7bn to £3.5bn, despite a slowdown in investment banking revenues, while Standard Chartered is tipped to increase its surplus to £2bn.

Sources suggested Lloyds and RBS were on course to meet their government-set targets of lending £44bn and £50bn gross respectively to small and medium-sized enterprises (SMEs).

But over the weekend chancellor George Osborne issued a warning to all banks in light of their resurgent earnings, saying the government “will not tolerate” a dearth of funding for British businesses.

He said: “The danger is that, particularly next year when there is a huge amount of refinancing required, small and medium-sized businesses suffer from a lack of access to working capital.”

The British Bankers’ Association immediately hit back. Chief executive Angela Knight said: “There are funds available to lend to firms with a viable business plan. But the industry’s ability to support the economy needs to be considered as the increased capital and cash we are required to hold cannot both be set aside and used to finance lending.”

Results of EU bank stress tests last month showed the UK’s institutions were already among the best capitalised in the world by tier one ratio, even under a “shock” scenario.

HSBC (today)
Expected half-year profit: £5.5bn
2009 first-half profit: £3.5bn

Lloyds Banking Group (Wednesday)
Expected half-year profit: £800m
2009 first-half loss: £4bn

Barclays (Thursday)
Expected half-year profit: £3.5bn
2009 first-half profit: £2.7bn

Standard Chartered (Wednesday)
Expected half-year profit: £2bn
2009 first-half profit: £1.9bn

Royal Bank of Scotland (Friday)
Expected half-year profit: £120m
2009 first-half loss: £1bn