Some things that just don’t add up

4 August 2009

Santander’s first half results, which showed a 30% leap in Abbey’s profits and a 5% increase in mortgage lending, offer an intriguing benchmark for Barclays and HSBC, which reported on Monday, Lloyds Banking Group which reports on Wednesday, and Royal Bank of Scotland which reports on Friday.

The Northern Rock, which posted losses of £742.2m today, is of course a basket case and its result only serve as a benchmark to the cost of political expediency.

That said, all the figures should be of special interest to the building societies, who are contributing disproportionately to the interest bill on the £21bn that the Financial Services Compensation Scheme has paid out over that same period, and to tax payers generally.

After all, £37bn of public money has been used to bail out Lloyds Banking Groups and RBS, the former which is expected to report losses in the region of £5bn and the latter, if we’re lucky, something close to break-even.

Barclays, which unlike Lloyds Banking Group and RBS declined to be bailed out by the government, actually reported Group pre-tax profits of £2.98bn with Barclays Capital - the firm’s investment banking division - posting a 100% increase in profits to £1.05bn.

On the retail banking side of things the figures offer a mixed picture with performance being affected by the low interest rate regime and mortgage impairment charges. Even so, average mortgage balance grew by 13%, reflecting positive net lending and at the end of the day it has retained its 7% share of the mortgage market.

But both Abbey and Barclays have benefited from windfalls offered by the UK and US governments.

Specifically, would Abbey have performed so well if it hadn’t been able to acquire Bradford & Bingley’s £20bn in retail deposits and its branch network last September for £612m as well as payments of £14.6bn from the FSCS and a further £4.5bn from the Treasury to facilitate the transfer?

In case this sounds a tad one-sided, it is important to remember that the mortgage assets of Bradford & Bingley (allegedly worth £50bn) have been nationalised and on maturity might even one day be used to redeem that £19.1bn transfer of public money to Abbey.

And as for Barclays, when Hank Paulson inadvertently let Lehman Brothers’ go, it was quick to snap up the investment arm of the bank’s North American business for a song, and the rest, as they say is history.

HSBC has also reported profits of around £3bn and, like Barclays, this was largely achieved on the back of good investment results – a development which rather questions the Tory wisdom of separating retail banking from investment banking because the latter is considered to be more volatile.

Lloyds Banking Group hasn’t got the same exposure in that market as Barclays or HSBC, though most of the losses it will be reporting will be attributable to the ill-advised marriage with HBOS which was deemed too big to fail. Well, now that it is even bigger, let’s hope the problems don’t get any worse.

But the last word must go to HSBC which has increased its share of the mortgage market from 4.3% to 9.5% over the last 12 months with mortgages accounting for two thirds of its gross lending figure of £4.2bn.

That has to please the authorities but by the same token they must be wondering what they’ve done to the building society model because in the same breath HSBC claims that it has more than offset the total £4.1bn of negative net lending reported by the UK’s 53 building societies over the same period.