Wednesday, August 10

What the bank results tell us about their and UK economy’s health



Four of Britain’s biggest banks reported annual results this week and insisted they were robust enough to withstand another global downturn. But what did the results for HSBC, Standard Chartered and the bailed-out duo of Lloyds Banking Group and Royal Bank of Scotland tell us about the industry and the wider economy?

Bonuses have not gone away, despite considerable public and political anger over pay since the 2008 crash. When the pay disclosures of the four banks from their annual results are added up, 800 or so of their employees received more than €1m (£790,000) in 2015. Barclays will add to that tally when its annual figures are published on Tuesday next week.

The four banks who have reported so far have cut their bonus pools for 2015, but that total still stands at £3.7bn. Chief executive pay was down at HSBC and Lloyds but their bosses still earned £7.3m and £8.5m respectively, while pay rose for the chief executives of RBS and Standard Chartered (in part because of a buy-out for its new chief executive) whose packages reached £3.8m and £9m respectively.


Despite years of damning inquiries and punitive fines, banks are still getting into trouble. Bankers are keen to point out that their problems relate to “legacy issues” – industry jargon for historical misdemeanours – but they are struggling to emerge from their shadow. The four banks’ annual reports contained a lengthy list of legal warnings of court cases and potential fines from regulators.

Predictably, the payment protect insurance scandal has continued to dominate. The damage faced by the industry now tops £30bn after Lloyds admitted this week that its bill alone had reached £16bn. Lloyds, though, has signalled that the saga could be drawing to a close. Banks are also setting aside money in case they have to pay compensation for controversial packaged bank accounts – which charge a monthly fee and offer perks such as insurance, but in some cases were missold.

Each bank has its own issues, too. RBS flagged a looming penalty from the US authorities over the way it sold bonds before the financial crisis – and the bill could run into billions of pounds. HSBC is still dealing with the consequences of a £1.2bn fine for money laundering offences in 2012, as it admitted that a monitor installed by the US in the wake of that scandal is concerned it is taking too long to tackle financial crime. Standard Chartered, meanwhile, revealed it was being investigated for potential failings in its defences against financial crime.

The UK and global economy

The UK economy is crucial for Lloyds and RBS, big lenders to British households and businesses. However, both are being held back from making bigger profits in their domestic businesses because interest rates are at a record low of 0.5%. Lloyds had expected the base rate to rise to 2.5% by 2017, but it revealed this week that it now believed borrowing costs would reach that level two years later – amid signals from the Bank of England that rate rises are not imminent.

Despite that, RBS customers are anticipating a rate rise. Just 15% of its customers are on variable rate mortgages after they moved to fixed rate products in recent years.

Both the bailed-out banks could be buffeted by a downturn in the global economy, but HSBC and Standard Chartered have the most exposure to a slump in China and emerging markets. “The current economic environment is uncertain,” said Stuart Gulliver, chief executive of HSBC.

Worryingly for banks with global exposure, interest rates around the world are either low or – in the case of the eurozone, Japan, Sweden and Switzerland – turning negative. This makes it difficult for banks to make profits on loans or attract deposits from savers.

However, the big question mark is over China, the world’s second largest economy, and whether its recent economic slowdown will become a crash. The prospect of a hard landing has rattled global stock markets and HSBC, which generates a significant amount of its income in Hong Kong, offered some reassurance. It said China was growing more slowly but it would still be the biggest contributor to global economic growth.


Lloyds was determined not to give a view on the EU referendum on 23 June, but RBS, HSBC and Standard Chartered were clearer. HSBC, which earlier this month said it would keep its headquarters in the UK, has warned 1,000 roles could go to Paris if the UK votes to leave. Standard Chartered, London-based but with operations across the globe, said the UK should not break away from Brussels. RBS cited the referendum as a risk to its business and warned of economic uncertainty related to the vote.

When will taxpayers get their money back in Lloyds and RBS?

Lloyds is in sight of the finish line – much to George Osborne’s relief. The taxpayer’s stake is now 9%, from the 43% shareholding the government held in 2008. That stake was built when the Treasury pumped in £20bn in wake of Lloyds’ rescue bid for HBOS, the owner of Halifax and Bank of Scotland. But last month the chancellor temporarily abandoned a pledge to make £2bn of shares available to the public at a discount, citing market turmoil.

Publication of Lloyds’ results on Thursday, however, put a rocket under the shares. They closed on Friday at 72.1p, just a whisker under the 73.6p at which taxpayers break even on their investment. Any sustained move above that level could allow Osborne to resume selling shares into the market, although any offering to the public seems unlikely until the outcome of the EU referendum is known.

The finishing line remains distant for RBS, however. As it reported its eighth consecutive annual loss this week, it also admitted any hope of returning cash to shareholders had been kicked beyond its target of early 2017. Osborne sold off the first chunk of RBS shares in August, reducing the stake from 79% to 73%. The shares closed at 226.6p this week – below the 502p break-even point.