Battered British Still Look to Key Role in Europe

When Britain deregulated its financial markets in 1986, banks scrambled madly to expand into securities and other previously restricted areas.

But these days, Big Bang has withered to big bust. Amid a deep recession, Britain's real estate lenders are mired in crisis, and sour corporate loans are spiraling. The result: British bankers have chucked their go-go game plans and are racing, instead, to slash costs and dig up new sources of income.

At no time since World War II has "the international banking industry faced as many uncertainties as it does today," said Sir John Quinton, chairman of Barclays Bank, Britain's largest.

To be sure, there are some positive signs. Some experts say adherence to international capital standards are forcing more-focused strategic approaches. Tamer interbank competition is gradually pushing lending margins higher. And British banks remain determined to assert themselves after 1992 as major players in the European Community's unified financial market.

Not the Best of Times

Nonetheless, these are hardly the best of times for British banks. Numbers illustrate this point.

This spring, Midland Bank PLC and Standard Chartered PLC cut their dividends for 1990. These marked the first such reductions since the Great Depression of the 1930s.

Those two banks - along with Barclays Bank, Lloyds, and National Westminster Bank PLC - last year posted combined trading profits of $12.4 billion, down 5.3% from $13.1 billion in 1989.

After huge provisions for souring domestic business loans, after-tax profits by the five banks slumped to $2.31 billion.

That figure was higher than aggregate earnings of $850 million in 1989, when the British banks wrote off large chunks of Third World debt. But it was off 60% from profits of $5.71 billion in 1988, a figure that offers a truer earnings comparison.

Restoring Margins

In a key response to eroding profitability, British bankers are working to restore net interest margins. From a high of 5.6% in 1986, this indicator plunged to 4.7% in 1989 and 4.2% last year.

Nonetheless, because of declining competition among banks, "there were definite signs of a widening in lending margins" in the second half of 1990, the Bank of England said.

In recent months, small businessmen claimed that Britain's large banks hadn't passed along to them reductions in the country's prime rate. But last month, a government investigation concluded the banks hadn't acted improperly.

Currently, prime stands at 11%, off from a 15% high last October.

Lord Alexander, National Westminster's chairman, also noted that the Basel capital standards "are driving the pricing of business to personal and corporate customers to more remunerative levels." The Basel standards require banks to increase their capital-to-asset ratios to 8% by the end of 1992.

Layoffs Are Due

Additional fallout from industrywide retrenchment is expected to come in the form of massive layoffs. In the next few years, labor unions estimate, 50,000 people in the banking and insurance industries - some 5.9% of the 850,000-person workforce - could lose their jobs.

By 1994, National Westminster Bank is expected to sever 17,000 of its 100,000 employees. The bank's workforce could sink to 50,000 by the end of the decade, NatWest executives confided.

Some banks offer those facing layoffs "gardening leave." Under the practice, workers receive full pay while their employer attempts to place them elsewhere inside the bank, said Richard Lynch, London division head of the banking union, BIFU.

Assets at Britain's top five banks increased 21.9% last year to a combined $768.28 billion (see table on this page). But in response to tough times, some troubled banks are aiming to sever noncore businesses. Midland Bank, for example, wants to dispose of its Forward Trust personal consumer financing arm.

Midland Bank's 1990 earnings fell to $22 million.

Insurance Attracts Banks

On the revenue side, British banks are expected to seek fresh income in new products. Led by Lloyds Bank and National Westminster, many are expanding into the insurance sector.

Because of the tighter, Basel capital standards, banks must seek to enhance their noninterest income, said National Westminster's Lord Alexander. Last year, such income comprised 39% of British banks' $40 billion in earnings.

Lord Alexander said banks may also seek to expand in other areas related to their core businesses. Along with insurance, mortgages and pensions may be among the most active areas, he said.

Already, the largest banks are upgrading their consumer banking and savings products. Compared with funds purchased in the wholesale money markets, such products remain a valuable source of low-cost deposits.

A Healthy Profit

The Bank of England estimates that banks still enjoy an average 2 1/2% gain on interest-free deposits, though the margin is falling as customers switch to interest-bearing checking accounts.

Until recently, checking accounts in Britain paid no interest.

Overseas, analysts said any British expansion will be largely confined to continental Europe. The British - like their rivals in France, Germany, and Italy - want to be well positioned for the unification of the European Community's financial markets, planned for 1992.

Barclays Leads in Mergers

Barclays' Sir John predicts a "real fight" among the big banks in Europe for a piece of the lucrative, EC marketplace. The EC comprises 12 member nations with a total population of 230 million. Besides Britain, its members are Belgium, France, West Germany, Italy, Luxembourg, Netherlands, Denmark, Ireland, Greece, Portugal, and Spain.

Barclays has taken the lead among the British with recent strategic acquisitions in the region. Last year, it bought Merck, Finck & Co. - a private, German banking house - for an undisclosed sum.

Subsequently, it purchased a $200 million stake in France's L'Europeene de Banque, a private, consumer banking and fund-management specialist with $2.5 billion in assets.

PHOTO : TOP BANKERS: Lord Alexander, top, chairman of National Westminster, and Sir John Quinton, who heads Barclays.

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