Britain's banks are likely to see their battered retail arms slide to a loss in the second half of 2009, as the cost of bad loans, tough competition and wholesale funding continues to weigh, a survey by accountants KPMG found. "Retail banking is just profitable at lower levels, but with rising impairments. It seems probable that it will fall into loss making in the second half of this year," KMPG said in its UK Banks Performance Benchmarking Survey on Wednesday.
David Sayer, head of retail banking for KPMG's advisory practice, said he was "slightly pessimistic" about the second half, though banks' retail losses could reverse in early 2010. "It's not a catastrophic shift, but if you are slightly pessimistic on house prices, if you believe there is a lagged effect on unemployment, and therefore you believe bad debts on credit cards and personal loans will rise, then you believe a marginal profit will become a marginal loss," he said.
Britain's Barclays, Lloyds and Royal Bank of Scotland all posted profits from their UK retail arms in the first six months of 2009, but at far reduced levels, as they were hit by, among other factors, soaring bad debts. Their bottom lines were instead lifted by investment banking operations that benefited from buoyant market conditions.
KPMG said it expected a positive effect to trickle through for retail and commercial arms as the lenders reprice their products to take account of higher funding costs and as prices stabilise, with margins improving "over the next two years". But it struck a note of caution on bad debts.
Lloyds Banking Group told investors earlier this month that its bad debts had likely peaked in the first half - at a hefty 13.4 billion pounds - largely because of its tough valuation of real estate assets badly hit in the credit crunch. KPMG said commercial impairments in particular expected to remain high "for the foreseeable future".
"We may have seen the top, but I wouldn't say we have seen the end. We are going to see impairments at quite a high level for some time," Sayer told Reuters in an interview. The survey also underlined a rising trend in unsecured impairments - which include credit cards and loans - and said this was not expected to peak before "2010 or beyond".
As for bad debts from the housing market, KPMG said the outlook remained uncertain, despite indications of a resilient housing market, and said unemployment levels would be crucial. Banks' balance sheets have reduced in size since the start of the crunch as demand has dropped and banks have tightened the purse strings.
Sayer said asset sales - as earmarked businesses actually move onto the sale block - could also help. "We will see a considerable number of banking businesses being available for sale over the coming 18 months, but that is a balance between willing buyers and willing sellers. Banks are going to want realistic prices for these assets," he said.