The bad news from banks is just beginning
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Associate Editor
David Stevenson May 08, 2009
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Whatever green shoots are sprouting, they're clearly not growing fast enough for the Bank of England's liking.
Debates about interest rates are now irrelevant – at 0.5%, rates can't really go any lower. Now it's all about how much money the Bank's going to print.
The big news from yesterday's meeting is that the Bank is going to pump another £50bn into the bond markets. That's on top of the £75bn it's already spent, or committed to spend.
But why print even more money if there's all this good news around? Well, maybe the Bank has a better grip on reality than the stock market. Because news from the banking sector suggests that the optimists are being a bit premature in hoping that this slump will end any time soon...
Why banks aren't lending
Banking stocks have been among the main gainers in the recent rally. But yesterday both Barclays and Lloyds - which was a surprise, as the City was expecting the latter's statement next week - spilled the beans about the state of their loan books. It wasn't pretty.
We pointed out last week (How Britain's borrowing is now hurting) that despite all the cheery chat about more loans becoming available, growth in UK bank lending to private individuals had slowed to just 2% year-on-year by the end of March. That compares with a near-9% annualised increase for the year before.
And now we know why. Borrowers are defaulting in droves, leaving the banks with no choice but to batten down the hatches.
The bad news from banks continues
The aspect of Barclays' results that drew the most attention was the surge in investment banking revenues, which soared due to its purchase of Lehman Brothers' US unit last year.
But in terms of the 'real' economy, Barclays has hiked its "impairment charges" - i.e. loan write-offs - by almost 80% in this year's first quarter, which meant profits at the bank's retail and commercial arm almost halved over the period. And the lender is expecting overall 2009 loan losses to jump 50% on last year.
The news was worse still at Lloyds. It turns out that its decision to help out the Government by absorbing HBOS was even more ill-judged than we already thought - HBOS's loan book has turned out to be even more toxic than expected. And as Dan Roberts pointed out in The Guardian, these were "not the esoteric derivatives that tripped up the first wave of banking casualties, but plain old loans to British business."
The bank revealed that corporate bad loans are rising "significantly" and could also rise by 50% this year, with commercial property in both Britain and Ireland topping the danger list.
And just to compound the misery, today Royal Bank of Scotland (another of our national banks) admits that first quarter bad debts have quadrupled. With the dole queues lengthening fast and house prices falling, it's not hard to see why.
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It's clear that another phase of the downturn is looming – indeed, James Ferguson argues in the latest edition of MoneyWeek magazine that we've barely seen the start of this banking crisis (if you're not already a subscriber, get your first three issues free here). No wonder analysts are getting jittery, with Barclays up more than four-fold since the market's dog days of just two months ago, while Lloyds and RBS are 130% higher. "The market's got ahead of itself with the domestic banks", says Leigh Goodwin at Fox-Pitt Kelton. "When you look at the impairments, particularly on commercial loan books, this is a bit of a reality check".
We'll end up paying for all this careless lending
And there's another twist. Who'll pay for these bad loans? The British taxpayer. We are all now on the hook for a major slice of Lloyds' and RBS' duff loan damage, thanks to the government's so-called Asset Protection Scheme. For Lloyds, this is the deal where Lloyds covers the first £25bn of its losses, and we have to shell out for 90% of the rest. And as the bank's total loss bill for 2009 alone is likely to be around £15bn, by the middle of next year Lloyds' losses could be ramping up our national debt even more. For RBS, we don't yet know the full details. But you can bet your bottom dollar that we'll be picking up the tab at some stage.
Talk about sharing the pain around!
That is, of course, unless the economy really is going to pick up by next year, in line with Alistair Darling's hopes. But the banks fear exactly the opposite. This morning, RBS boss Steven Hester summed it up - he expects "2009 and 2010 to be very tough years for RBS". With regard to bad debts, he's "not seeing any green shoots", he tells The Guardian.
It's always been clear that whatever the stock market's been doing recently, the UK economy is set for many months in the doldrums, and that the fallout would reach far and wide. If you were smart enough to pick up banking shares in March, now might be a good time to take profits.
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