U.K. Banks Set to Make Billions

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With U.K. GDP growth turning turtle, soaring inflation prompting calls for higher rates, and deep spending cuts imminent, many feel that Britain is on a knife edge -- as reflected in crumbling consumer confidence. 

Yet look at the recent manufacturing Purchasing Managers Index survey or rising private-sector job vacancies, and you can paint a more positive picture.

Sitting square in the middle of these conflicting stories, of recovery and relapse, and of a fair amount of hurled vegetables from the public, are the big five FTSE-listed banks, particularly partly state-owned Lloyds Banking Group (NYSE: LYG) and Royal Bank of Scotland (NYSE: RBS), which are most geared to the domestic economy.

Higher interest rates while the economy remains weak would hammer Lloyds' and RBS's profits, as well as threatening more writedowns if the house-price crash resumes. Their shareholders -- including taxpayers seeking a profit on their bank bailout -- would undoubtedly suffer in a fresh downturn, so it will be intriguing to hear the banks' outlook.

The other three banks will tell us far more about what is going on globally. Their results will still make domestic headlines, though, not least because any bumper bonuses will be about as politically welcome as General Mubarak in downtown Cairo -- even if we should logically welcome the much-needed accompanying tax windfall.

Against this backdrop, here's a preview of what analysts predict from the big banks (estimates issued in the past 28 days, sourced from Bloomberg), plus the dates for your diary. 

Barclays: bloated
Results: Feb. 15

Barclays (NYSE: BCS) was the first of the winded British banks to bounce back, thanks partly to nifty trading in the chaotic aftermath of the financial crisis. 

Management also did well to avoid U.K. state aid, and to pick up Lehman Brothers' assets on the cheap. However, overheads have increased, and the expected investment banking boom hasn't materialized. CEO Bob Diamond will need to show he's tackling staff costs and refocusing Barclays for the new era in banking.

RBS: royal mess
Results: Feb. 24

RBS still looks pretty sickly, with one analyst expecting it to barely break even. 

The bank probably won't speak to recent rumors that the government could begin reducing its 84% stake as early as next year, but CEO Stephen Hestor has made no secret that he'd prefer to lose his biggest shareholder. That'd let him pay whatever he wants, for starters -- he's previously blamed the government's anti-bonus bias for a loss of staff and shareholder value.

Lloyds: luck of the Irish
Results: Feb. 25

Things were going reasonably well for Lloyds in August 2010, when impairments were falling and profitability surging. Then in late December it sneaked out its response to the Irish crisis -- higher impairment charges, and a whack to its profits that pretty much wiped out what most analysts expected. 

Some pundits -- including me -- expect new CEO Antonio Horta-Osorio to do a bit of kitchen-sinking with his first results, too. No wonder pre-tax profit estimates vary hugely, from 2 billion pounds to the same in the red!

HSBC: haymaking
Results: Feb. 28

Despite inaugurating the credit crisis when it reported trouble at its U.S. subprime division, HSBC (NYSE: HBC) rode the subsequent storm as well as any mega-bank. That was largely thanks to the bank's Asian operations, which account for around 50% of its pre-tax profits. 

Asia's strong savings culture means HSBC isn't reliant on wholesale funding, either. Hardly surprising that new CEO Stephen Gulliver is moving to Hong Kong.

Standard Chartered: standard procedure

Results: March 2

Last but certainly not least, Standard Chartered offers peerless bank exposure to the emerging markets, and that's been the place to be recently. 

Standard Chartered grew both profits and its dividend throughout the downturn, and we can expect it to report more clockwork progress in 2010. The downside is a relatively high valuation, though the shares are off their recent highs.

More from Owain Bennallack:

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Owain owns shares in Standard Chartered and Lloyds.

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