By Patricia Kowsmann
Of DOW JONES NEWSWIRES
TAKING THE PULSE: U.K. banks are expected to show a strong performance from their investment banking businesses in the third quarter, but bad-debt charges are likely to weigh on the results, as the U.K. economy continues to face its most prolonged recession on record.
Analysts, however, said bad-loan provisions could have peaked, and are unlikely to jump again unless the financial system is hit by another wave of distress.
"Mortgage bad-debt may have peaked because housing prices have improved, but unsecured lending is still in parts bad. But overall, the mortgage side will more than make up for the unsecured lending side," Oriel Securities analyst Mike Trippitt said.
Two U.K. banks, including 43%-government owned Lloyds Banking Group PLC (LYG), have already disclosed decent performances for the period ended Sept. 30 compared with last year, when the financial crisis reached its peak.
Last week, Standard Chartered PLC (STAN.LN) said its wholesale banking business continued to see a strong performance in the quarter, while loan-impairment charges in its consumer division were lower than expected.
Meanwhile, Lloyds said it has "delivered a robust trading performance over the last three months" when it updated the market about its plan to escape a government asset-protection scheme by raising GBP21 billion in fresh capital from holders.
It, however, said it is expected to report a pretax loss for the year, despite an expected fall in impairment charges in the second half of the year.
U.K. banks aren't required to provide earnings figures for the first and third quarters, and instead they often give statements on the overall performance of their divisions.
According to analysts, although investors are likely to see the strong trading gains other European and U.S. peers have, growth in retail and commercial lending is expected to remain muted.
The only exception could come from HSBC Holdings PLC (HBC), which like Standard Chartered, is increasingly focused in Asia, where most countries have already recovered from the global recession.
ANALYSTS' PICK
Barclays PLC (BCS) could be the best performer among U.K. banks in the past quarter, as its Barclays Capital division is likely to report strong numbers. "Barclays is positioning itself as a winner as the European and U.S. banking markets consolidate. It is taking market share in its core franchises and continues to expand its platform globally," Morgan Stanley said in a note.
COMPANIES TO WATCH:
*RBS (Friday)
MAIN FOCUS: Royal Bank of Scotland Ltd. (RBS) is expected to report that bad-debt charges are stabilizing, based on comments from Chief Executive Stephen Hester when the 70%-state owned bank announced this week its participation on the government's asset-protection scheme. Analysts are also looking for evidence of less-severe deterioration in the net interest margin--the difference between interest earned on loans and paid on deposits. Also key will be more updates on the expected asset disposals under European Union negotiations, which could hit future earnings considerably.
*HSBC (Tuesday)
MAIN FOCUS: Focus will be again on HSBC's U.S. operations, particularly bad-debt charges. "While we believe it may be too early for HSBC to call the turn in U.S. impairments, we look for further commentary that this time may be approaching," Credit Suisse said in a note. Nonetheless, it said that "HSBC remains one of our preferred U.K. banks given its balance sheet and capital strength versus the sector, and the potential for significant earnings recovery in 2010 driven by improvement in U.S. impairments."
*Barclays (Tuesday)
MAIN FOCUS: The business' trading operations, which includes the former Lehman Brothers U.S. business bought last year, was a big winner in the first half of the year, and is likely to continue showing strong results, although at a lower rate, as markets have become less volatile. According to Morgan Stanley, an improvement in residential and commercial real estate markets will also likely mean fewer impairment charges for the bank. More comments on the departure of Frits Seegers, chief executive of global retail and commercial banking, and what it means for the division are also possible.
-By Patricia Kowsmann, Dow Jones Newswires. Tel +44(0)207-842-9295, patricia.kowsmann@dowjones.com