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U.K. Banks’ Profit May Increase on Declining Bad Debt

HSBC may say net income rose 83 percent
An artist paints a scene including the Canary Wharf development, showing buildings for Barclays Plc, right, HSBC Holdings Plc, second right and Citigroup Inc, center, in London. Photographer: Chris Ratcliffe/Bloomberg

Britain’s five biggest banks, including HSBC Holdings Plc and Barclays Plc, may say profit soared to 8.4 billion pounds ($13.1 billion) in the first half as falling bad loan provisions mitigate slowing growth in investment-banking revenue.

Net income in the six months to the end of June probably rose from 281 million pounds in the year-earlier period, according to median estimates from analysts in a telephone and e-mail survey by Bloomberg News. HSBC, Lloyds Banking Group Plc, Standard Chartered Plc, Barclays and Royal Bank of Scotland Group Plc report from Aug. 2 to Aug. 6.

“Impairments will be substantially better,” said Alan Beaney, who helps manage about 200 million pounds at R.C. Brown Investment Management in Bristol, England. “Banks took very aggressive writedowns last year and some of those were for a worst-case scenario which has not transpired.”

Britain’s banks are benefiting from a decline in provisions, having set aside 35 billion-pounds for bad debts a year ago during the country’s worst recession since World War II. That will help offset a slowdown in investment banking revenue, which was “softer” in the second quarter, Barclays’s Finance Director Chris Lucas said on June 30.

HSBC may say net income rose 83 percent to $6.14 billion from $3.35 billion, according to the median estimate of nine analysts in the Bloomberg News survey.

Losses Narrow

Bad debts fell with the closure to new customers of its former U.S. subprime consumer finance operation last year. Losses in North America probably narrowed to $1.1 billion from $3.7 billion, analyst Carla Antunes da Silva at JPMorgan Chase & Co. wrote in a note to investors on July 19.

Pretax profit at HSBC’s investment banking unit, led by Stuart Gulliver, probably fell 33 percent to $4.24 billion, da Silva wrote.

Credit Suisse Group AG, Goldman Sachs Group Inc., Citigroup Inc., JPMorgan Chase & Co., Morgan Stanley, and Bank of America Corp., on average reported a 34 percent drop in trading revenue in the second quarter from the first, company reports show. UBS AG’s investment bank posted a decline in trading revenue in the second-quarter, while beating analysts’ estimates. Sales and trading at the securities unit of Deutsche Bank AG fell 15 percent in the three months to June from a year earlier.

“Investment banking has for the last two or three months been poor,” said Guy de Blonay, who helps manage about 19.5 billion pounds at Jupiter Fund Management Plc in London. “It’s been a difficult environment and expectations are low, so we’ll look for a surprise.”

‘No Return’

Barclays may say net income rose to 2 billion pounds from 1.89 billion pounds, as provisions for bad debts and credit markdowns fell, according to the median estimate of nine analysts in the survey.

Barclays Capital, the investment banking division led by Robert Diamond, hired 750 people last year to boost equities and mergers advisory revenue in Europe and Asia. Costs at the division probably rose 27 percent to 3.9 billion pounds, while revenue excluding credit markdowns may fall 34 percent to 6.9 billion pounds from a year ago, wrote Jason Napier, an analyst at Deutsche Bank AG in London in a note to investors this month.

The expansion followed its acquisition of the North American operations of Lehman Brothers Holdings Plc in 2008.

“We continue to forecast no return to the exceptional revenues achieved in 2009, notwithstanding the accelerated build-out of Barclays Capital’s equities platform in Europe and Asia,” wrote Ian Gordon, an analyst at Exane BNP Paribas SA in a note to investors on July 27.

Lower Impairments

Standard Chartered, which makes most of its profit in Asia, will probably report a 13 percent rise in net income to $2.19 billion, on lower impairments at its corporate banking division, according to the median of five analysts in the Bloomberg News survey.

RBS, Britain’s biggest government-controlled bank, will narrow its loss to 80 million pounds from a loss of 1.04 billion pounds a year ago, with the recovery in the economy, wrote analyst Mark Phin at Keefe, Bruyette & Woods Ltd. in a note to investors this month. Bad loan provisions will decline by 2.14 billion pounds to 5.38 billion pounds, according to Phin.

In February, RBS Chief Executive Officer Stephen Hester said the bank is likely to return to profit in 2011.

‘Housing Issue’

Lloyds will probably post a proforma pretax profit of 1 billion pounds, from a loss of about 4 billion pounds, according to the median of five analysts surveyed by Bloomberg News. In February, CEO Eric Daniels said bad debts at the 41 percent government-owned bank peaked in 2009, following the acquisition of HBOS Plc. The bank returned to profitability in the first quarter and should be profitable for the full year, Daniels said in April.

“The issue for the U.K. domestic banks is the consumer and housing,” said Julian Chillingworth, chief investment officer at Rathbone Brothers Plc, which manages about $21 billion. “People will be concentrating more on the outlook statements than the numbers.”

HSBC is scheduled to report earnings on Aug. 2, Lloyds and Standard Chartered on Aug. 4, Barclays on Aug. 5 and RBS on Aug. 6.

The table below provides median estimates for profit with the number of analysts in the Bloomberg News telephone and e-mail survey in the right column. Estimates are in millions of pounds unless stated.

                 First Half       First Half       No. of
                 2010             2009             Analysts
                 Estimate         Actual           Surveyed

Net Income       $6,138            $3,347             9
Bad loan
Provisions     -$10,040          -$13,931             3
Assets       $2,337,493        $2,421,843             3

Net income        2,006             1,888             9
Bad loan
Provisions       -3,291            -4,556             4
Assets        1,388,992         1,545,338             4

Net income          -80            -1,042             1
Bad loan
Provisions       -5,383            -7,521             1
Assets        1,505,144         1,644,400             1

Profit            1,081            -3,957             5
Bad loan
Provisions       -6,391           -13,399             3
Assets        1,005,112         1,063,129             1

Net income       $2,187            $1,933             5
Bad loan
Provisions        -$569           -$1,088             2
Assets         $454,119          $411,220             1

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