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The outlook for UK banking results this week

So today marks the start of the bank reporting season in the UK which, based upon last week’s results in the USA and Europe, will be pretty bleak too.

First, we have HSBC which is a mixed bag of news.

According to the Telegraph, HSBC will report “a profit for the first six months of the year of $10.9 billion, becoming the first of the UK's major banks to announce its interim financial performance.

“The profit figure, which means HSBC made nearly $1.7 billion of profit in each of the first months of the year, is slightly down on the same period in 2010 when the bank reported a before-tax profit of $11.1 billion.

“HSBC currently employs 335,000 staff around the world and the redundancies would equal about 3pc of its total workforce.

“Mr Gulliver wants to reduce HSBC's cost income ratio to between 48pc to 52pc. In the second half of last year the bank reported a cost income ratio of 60pc and in the first six months of this year analysts at Credit Suisse estimate this has fallen to 57pc.

“Profits from HSBC's personal financial services business are forecast to have more than doubled to $3.2 billion compared with the same period in 2010, largely as a result of reduced losses in the bank's North America business, which lost $1.5 billion in the first half of last year …

“Global banking markets, HSBC's investment banking division, is expected to have recorded about a £1 billion fall in profits compared with the first six months of 2010 at £4.6 billion.”

One point of note is how HSBC is restructuring, started with the sale of its 195 branch network in upstate New York to First Niagara Bank for $1 billion (£609m).

HSBC also recently sold its Russian business and further sales of international retail banking businesses are considered likely, though the bank has ruled out selling any of its UK, French or German operations.

One point to note in HSBC’s globality is the retrenchment of operations, and the refocusing from shrinking markets – the USA – to growth markets – Asia.  For example, although profits were boosted by growth in emerging markets, there were still write-downs in the USA of around $3 billion, two-thirds the figure of last year and adding to the cumulative pot of near $70 billion losses on Household since its acquisition in 2003.

This is why Stuart Gulliver announced in May, that HSBC would slash costs by up to $3.5 billion by 2013 with the savings “ploughed back into fast-growing markets around the world, especially in Asia.  The lender has already said it would be hiring at least 2,000 extra people in mainland China and Singapore over the next five years, as it seeks to tap the fast-growing Asia Pacific market.”

Apart from HSBC, and looking around the other banks, the outlook is also grim.

Lloyds and RBS have seen their shares plunge 30% and 17% respectively in the last six months alone, while Barclays' shares have plummeted 26% and HSBC has lost 14%.

Much of this is down to severe downturns in trading, with some bulge bracket firms reporting that year-on-year trading was down by over 25% in June.

At Barclays Capital, the investment banking arm of Barclays, analysts estimate that profits could have fallen by about 40pc to just over £2 billion in the first half of the year compared with the same period in 2010.  In 2009 the division reported revenues of £13.7 billion, up nearly 90pc on 2008. A year later revenues had dropped by more than a third to less than £9 billion and this year the forecast is for a fall of another 8pc to around £8.1 billion.

Taxpayer-backed Lloyds Banking Group is expected to report pre-tax profits of £1 billion on Thursday, a steep reduction on the £1.6 billion reported a year earlier.  Losses in Ireland and Australia, although still high at £2.2 billion, will be £1.4 billion lower than the second half of 2010.

Royal Bank of Scotland closes the week with its results on Friday, which are expected to reveal £611 million in reported profits, down 19% on the previous year.  Much of this will be due to disappointing investment banking results, down 31% over the same period last year.  This represents a more than halving in profits in its global banking and markets business to £1.3 billion. Nevertheless, RBS will show overall business lending is up, driven by increased borrowing from large corporates.

Analysts estimate the combined pre-tax profits of the so-called "casino banking" divisions at Barclays, HSBC, Royal Bank of Scotland, Standard Chartered and Lloyds Banking Group fell from £11.1 billion in 2010 to £9.1 billion in the first six month of this year.

All of this means lots and lots of job losses.

Apart from the 10,000 at HSBC, there were 15,000 job losses announced in June by Lloyds Banking Group, taking the total number of redundancies at the bank since its rescue by the taxpayer to about 40,000. Royal Bank of Scotland has already shed 28,000 staff since the financial crisis started.

Barclays has been shedding staff for months, with Barclays Capital, its investment banking arm, cutting about 600 people worldwide since January and its retail business losing almost 2,000.

At UBS, as many as 5,000 jobs are set to go across the group, including the bank’s wealth management arm. Credit Suisse is eliminating about 2,000 positions, largely in its investment bank.

Goldman Sachs, the US investment bank, was the first to announce a substantial cull of jobs last month, saying it was trimming 1,000 posts after a poor performance by its fixed- income trading division.

The overall expectations are that as many as 15,000 City-workers, or about 5pc of London-based financial services staff, will lose their jobs before the end of the year, resulting in a drop of more about £1.3 billion in lost income tax revenues for the Exchequer.

This is based on an average salary of £150,000 and income tax of 50pc, employer national insurance of 2pc and employee national insurance of 2pc, this works out an average lost tax income per lost City job of £81,000, or a total loss of about £1.3 billion in tax revenue.

To put this into context, financial services workers paid a total of £18 billion income tax for the tax year 2009/10, or 15pc of the UK total, so this year's redundancies alone could lower the sector's income tax contribution by about 7pc.

It’s not all bad news however, as Standard Chartered is set to announce pre-tax profit of around $3.5 billion, up from $3.1 billion in the first half of 2010.  Again, this reflects the strength of Asia.

Also, the taxpayer “made a net profit of £339.8 million pounds in the first half of 2011 from the assets they still hold in Bradford & Bingley Plc and Northern Rock (Asset Management) Plc.”  So that’s not so bad then.

Meanwhile one Spanish Bank, Bankia, has offered the ECB Cristiano Ronaldo as collateral for their loans.  What is the world becoming?

The above is an amalgam of a variety of articles as follows:

 

 

 

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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