Banks announce increase in profits

HSBC and Northern Rock announce first half profits. So does this mean the worst is over for the economy?

HSBC, the UK’s biggest bank yesterday announced pre-tax profits of £7bn for the first six months of 2010. This is more than double the profits made during the same period in 2009 and way ahead of analysts’ forecasts. A figure made even more impressive given that HSBC, to date, has not received any direct support from the government, unlike a number of its rivals

The full story can be found here.

So this is good news right? Yes it is but if you read between the numbers “falling bad loan provisions did most of the hard work in HSBC's first half", says the FT's Lex column, as opposed to increased revenues. But hopefully HSBC have seen a real drop in the loan defaults rather than a mere accounting shuffle. An improving economic outlook, a drop in bad debt provisions and an increase in profitability is welcomed news not only for the company itself but for the UK economy as, according to an article in The Telegraph, the City of London is still key to UK recovery.

Today Northern Rock got in on the act. In a case of good rock/bad rock, Northern Rock Plc (the ‘good’ part of the bank, following the split of the original Northern Rock bank, which holds savers’ deposits and some mortgages) made a loss of £142.6m before tax. Northern Rock Asset Management (NRAM), the ‘bad’ part which holds most of the rescued banks old mortgages and unsecured loans, made a profit of £349.7m compared to a loss of £724.2m this time last year.

Once again part of the reason for NRAM’s turn-around was, to quote the BBC, due to “a big reduction in the money set aside to cover loans that may not be repaid. This is because, as economic conditions improve, the bank expects more loans to be repaid”. I’m always slightly nervous when I read the word ‘expect’ in relation to debt and defaults.

An increase in profits is good news as long it is indicative of a genuine turn-around as opposed to optimistic accounting practices. And it does give rise to an interesting question. Given that the economic recovery is far from certain, should we head into a double dip recession will these profits be short-lived as bad debts inevitably increase? I think I’ll keep the champagne on ice for now.

Inevitably people will complain that as the banks are making profits they should be lending more and while I can understand the moral argument with regard to nationalised banks it doesn't stack up for the likes of HSBC. Banks are not charities they are businesses which need to make a profit. The banks are still lending but on a more selective basis than before - and this will (and should) continue for some time yet. Is it not more important that the banks shore up their balance sheets rather than start lending irresponsibly? Isn't irresponsible lending exactly how we got into this mess in the first place? And as the saying goes, two wrongs don't make a right.