UK banks set for record profits

The UK banking sector is shaping up to deliver combined profits of more than £38bn (€56.4bn) for 2006 as the major players line up to release their full year results.

Analysts are expecting a bumper reporting season from banks when the "big five" begin to post results next week, kicked off by Barclays on Tuesday.

The banks are poised to meet if not beat City expectations, with forecasts suggesting the top five banks alone will notch up some £36.9bn (€54.8bn) of profits, up again on the £33.4bn (€49.6bn) seen in 2005.

Barclays and rivals such as HSBC and HBOS are expected to follow the lead of mortgage bank Northern Rock, which last month posted full year underlying profits up 16.5% on 2005 at £587.7m (€872.37m) - nearly £8m (€11.87m) more than the market had been predicting.

Fellow mortgage specialist Bradford & Bingley also posted an 8% rise in profits for 2006 to £336.1m (€498.9m).

Richard Hunter, head of UK equities at Hargreaves Lansdown, said: "On the whole banks are in rude health. Stringent cost control measures over the last few years have meant that, as for so much of UK plc, strong corporate earnings are being enjoyed."

Bad debts and unsecured lending were focused on heavily last year, with most of the sector tightening their lending criteria and hedging against further problems.

But it is clear that not all the banks are out of the woods after HSBC warned earlier this month that it would have to put aside 20%, or $1.7bn (€2.5bn), more for bad debts than the City had been expecting to cover US borrowers defaulting on their mortgages.

Samir Shah, Teather & Greenwood's banks and speciality finance analyst, said HSBC-owned First Direct's move to axe free banking for customers who do not hold or pay in a certain amount with the bank was set to be a key theme in the sector for the year ahead.

He said: "One of the factors for 2007 will be the emergence of non-free private banking, with more and more banks requiring upfront charges and fees."