Despite Plummeting Profits, U.K. Banks' Outlook Is Rosy
LONDON - The latest numbers may make British banks look seriously crippled, but their robust capital bases should enable them to hold their ground against European challengers, analysts said.
The half-year results announced recently revealed a sector beset by plummeting profits and record bad-debt provisions, while capital ratios remained way above minimum requirements.
"U.K. bank profitability looks awful compared with European peers," said analyst Chris Wheeler at Shearson Lehman Brothers, but people really look at the British banks' "strong capital bases."
Changes Go into Effect in '92
The banks' capital bases are measured by stringent new guidelines set down by the Bank for International Settlements. The guidelines, which take effect in 1992, require banks to hold risk-weighted capital-to-reserve ratios of at least 8%, with at least half the capital being Tier 1 or "core" capital.
The capital strength of United Kingdom banks derives from three main sources:
* Traditional profitable business.
* A spate of rights issues over the past years.
* The arrival of new banks in the market, with a heavy capital endowment.
Margins have surged in the past 18 months, from as little as 20 basis points over London interbank offered rates to 60 or 70 basis points now, considered sufficient to bring an acceptable return on equity.
Despite the hammering U.K. banks have taken on profits, European competitors have made few inroads into their big-ticket lending.
Germans Digesting Costs
Analyst Thomas Albrecht at UBS Phillips & Drew said that German banks, among the most powerful in Europe, were engaged in digesting the costs of expanding into the former East Germany.
He said a danger might arise if U.K. banks tried to squeeze much higher margins out of large corporate customers.