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British banks are preparing to update the market on trade in the first three months of the year amid signs the worst of the financial crisis could be over. Rivals in the US this month reported first-quarter results largely free of nasty shocks while the full nationalisation of Lloyds Banking Group, Royal Bank of Scotland and Barclays looks to have been averted at least for now.
Shares in UK banks have rallied strongly as a result, albeit from a miserably low base, and the FTSE 100 index is back above 4000 having crashed to a six-year low of around 3500 in early March.
So there is reason to hope that it could be the most upbeat set of reports for some time and the City is looking for a strong performance from Barclays in particular on 7 May driven by profits in investment banking and fixed income.
However, any shocks could send share prices tumbling and banks are still making heavy losses on bad loans and toxic investments. As Australian-owned Clydesdale and Yorkshire Banks showed today, although the banking crisis may be easing, the crisis in the real economy is getting worse:
Mortgage arrears
A key indicator will be the number of households struggling with mortgage repayments.
The Council of Mortgage Lenders is forecasting 4.4% of mortgages to be more than three months in arrears by the end of the year driven by rising unemployment. That amounts to 500,000 households and is more than double the 219,000 in arrears at the end of 2008.
Northern Rock last week said arrears have soared by 25% in the first three months of the year to 22,000, or 3.67% of its loan book, and figures from Spanish bank Santander will tomorrow show the extent of the problem at Abbey, Alliance & Leicester and Bradford & Bingley. The number of arrears at Abbey jumped nearly 40% last year to 10,897.
Lloyds will also take a sizeable hit, not only from its own customers but also those taken on when it rescued Halifax owner HBOS, the biggest mortgage lender in Britain. The Government is desperate that this does not transfer into repossessions, particularly with a general election looming, and has urged banks to support troubled borrowers.
Negative equity
Analysts at Sanford C Bernstein reckon falling house prices mean 1.8 million households will be in negative equity by the end of 2010, double the current level and more than the 1.3 million in the housing crash of the early 1990s. The losses to the banks are likely to be limited by low levels of house purchase at the peak of the market and relatively low loan-to-value ratios during the past decade compared to the late 1980s. Low interest rates have also encouraged borrowers to pay-off large amounts of equity and helped reduce outstanding debt.
Barclays is likely to fare better than the rest, with 10% of mortgages by value in negative equity by the end of next year against 25% at RBS, 30% at Lloyds and more than 50% at taxpayer-owned Northern Rock.
Credit cards
Banks will be forced to make a substantial amount of fresh provisions to cover bad debts on credit cards and other unsecured loans as recession deepens and unemployment rises from two million to above three million.
Within the £260 billion of toxic assets Lloyds has put into the Government's Asset Protection Scheme, some £20 billion is in personal loans and there is bound to be a deterioration at the Black Horse bank and its rivals. But while losses on credit cards are rising, spending looks set to have been muted in recent months as consumers rein in borrowing and look to pay off their debts.
Corporate loans
The outlook for business remains troubled as banks hit by losses on corporate loans remain reluctant to provide funding. The Bank of England says gross new lending to corporates ticked up in March but much of this was expensive restructuring rather than new credit.
Lloyds was forced to admit to shocking losses of £7 billion at the Bank of Scotland corporate division after reckless lending left it exposed to areas worst hit by the credit crunch, such as commercial property.
Other banks have also been exposed although further writedowns at Lloyds and RBS will be covered by taxpayers rather than shareholders after the failed duo put a combined £585 billion of assets into the APS.
For as long as banks are racking up losses on their corporate loan books, further borrowing will be both expensive and restricted, tipping many more businesses over the edge.
Lending
The Government has forced taxpayer-funded banks Northern Rock, Lloyds and RBS to increase lending to consumers and businesses and Barclays is looking to expand its share of the mortgage market. But despite increases in lending since the lows of last year, the economy is still starved of much of the credit it needs to recover from recession. What credit is being provided is proving profitable for banks as low interest rates widen margins.
Analysis by Credit Suisse shows spreads on mortgages and personal loans — the difference between what the bank pays to borrow money and what it charges to lend it to customers — have more than doubled over the last 12 months.
However, the increase in lending during recession could lead to more bad debts and the need to raise further funds whether from private investors or the Government.
