Retail arms of UK lenders likely to post losses - KPMG
August 20, 2009
By Reuters London
UK banks are likely to see their battered retail arms slide to losses in the second half of the year, as the cost of bad loans, tough competition and wholesale funding takes its toll.
This is according to KPMG in its UK Banks Performance Benchmarking Survey released yesterday.
"Retail banking is just profitable at lower levels, but with rising impairments. It seems probable that it will fall into loss in the second half of this year," the survey said.
David Sayer of KPMG's advisory practice was "slightly pessimistic" about the second half, though banks' retail losses could reverse early next year.
"It's not a catastrophic shift, but if you're slightly pessimistic on house prices, if you believe there is a lagged effect on unemployment, and thus believe bad debts on credit cards and personal loans will rise, then you believe a marginal profit will become a marginal loss," he said.
Barclays, Lloyds and Royal Bank of Scotland posted profits from their UK retail arms in the first half, but at far reduced levels, as they were hit by soaring bad debts. Their bottom lines were instead lifted by investment banking operations that benefited from buoyant market conditions.
KPMG expected a positive effect to trickle through for retail and commercial arms as the lenders repriced their products to take account of higher funding costs and as prices stabilised, with margins improving "over the next two years".
But it struck a note of caution on bad debts. Lloyds told investors earlier this month that its bad debts had likely peaked in the first half, at a hefty £13.4 billion (R178bn).
Commercial impairments were expected to remain high "for the foreseeable future".
"We may have seen the top, but (not) the end. We are going to see impairments at quite a high level for some time," Sayer said.
The survey underlined a rising trend in unsecured impairments, including credit cards and loans, and this was not expected to peak before next year.
As for bad housing debts, the outlook was uncertain, despite indications of a resilient housing market, and unemployment levels would be crucial.
Banks' balance sheets have shrunk since the start of the credit crunch as demand has dropped and banks have tightened the purse strings. Sayer said asset sales could help.
"We'll see (many) banking businesses available for sale in the coming 18 months, but that is a balance between willing buyers and willing sellers. Banks want realistic prices for these assets," he said. - Reuters
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