Debt woes ease as UK banks see sharp fall in loan losses

Barclays and HSBC today gave hope that consumer debt woes in the UK were starting to ease as the banking giants reported sharp quarter-on-quarter falls in loan losses.

Third quarter figures from the UK’s two top banks revealed a hike in underlying profits so far this year thanks to strong investment banking performances and an improving picture for bad debt charges.

Barclays said a recovering global economy would likely see impairment charges for the year come in lower than first forecast, while HSBC’s bad debts fell to their lowest level for more than a year.

The news highlighted the widening gulf between the two banks and their part-nationalised counterparts Royal Bank of Scotland and Lloyds Banking Group, while there was also more jobs misery announced at Lloyds today.

The group, which is 43% owned by the taxpayer, announced plans for another 5,000 job cuts in 2010 on top of around 10,000 already axed since its ill-fated rescue takeover of HBOS last year.

Barclays and HSBC have avoided turning to the Government for state aid and are seeing swift recoveries from the financial meltdown.

HSBC said the worst of the global economic crisis was over as it reported underlying third quarter profits “significantly ahead” of a year earlier.

Michael Geoghegan, group chief executive of HSBC, said “the biggest jolt has now passed”, although he warned it was “too early to claim victory”.

Barclays reported £4.54bn (€5.07bn) in profits for the first nine months of the year – down by nearly a fifth against a year earlier.

But the group said the result more than doubled on an underlying basis as it had enjoyed “consistent profitability” so far in 2009. Third quarter pre-tax profits came in at £1.56bn (€1.74bn).

Concerns are mounting that the better results will see the return of excessive bank bonuses.

But Barclays and HSBC sought to assure that decisions have yet to be made on annual payouts.

Barclays said bonuses were accruing at a “broadly consistent” rate to prior years, although it claimed this did not mean it was reverting to former bonus policies.

It has already signed up to international G20 rules on pay reforms which recommend clawback clauses and deferral over a number of years.

The bank is also talking to major investors over bonus pool levels ahead of its year-end decision.

“We will be fully compliant with the G20 rules in considering bonus amounts and we will be thinking of all our stakeholders – employees, shareholders and the broader community – and we will be taking into account all of their views,” said Barclays.

HSBC, which has also agreed to the G20 recommendations, said it would pay “appropriate” levels, “at the same time being conscious of the environment in which we are operating”.

But the banks are walking difficult tightropes, with their investment banking divisions – traditionally big bonus payers – producing the best results for years as they take advantage of currency movements, interest rates and credit spreads.

Barclays said its Barclays Capital operation, beefed-up in the wake of its takeover of parts of bankrupt US rival Lehman Brothers, helped drive a 26% leap in income to £23.8bn (€26.5bn) in the first nine months of 2009 – more than for the whole of 2008.

And HSBC said its global banking and markets arm was enjoying a “record” year.

However, shares in the two banks saw mixed fortunes in the FTSE 100 Index as investors registered disappointment that BarCap’s results were slightly weaker than hoped.

Barclays stock fell 5%, while HSBC rose 4%.

Analysts at Credit Suisse said there were “some negatives” in the Barclays statement, but they added it was “a decent performance with good balance across the divisions”.

HSBC’s bad debt cheer was received well, with Killik & Co head of equities Jonathan Jackson scrapping his sell rating on the group and praising an “upbeat” third quarter statement.

HSBC has been hit hard by impairment charges and was the first of the banks to flag up the start of the credit crunch, given its huge exposure to sub-prime mortgage borrowers in the US.

The group’s bad debts rose by 39% to $13.9bn in the first half and it has been slashing costs to counter market pressures – only last week announcing another 1,700 job cuts in the UK.

Today’s statement signalled that impairments were coming down in nearly all markets, including its troubled US consumer lending division, which saw its first quarterly drop since the start of 2006.

Barclays warned there may be a slight pick-up in bad debt charges in the fourth quarter on top of £6.2bn (€6.92bn) already taken this year, although it believes impairments will now peak sooner than first thought, at the end of 2009 or first quarter in 2010.