Comment: Weak economy is real drag on bank profits

By GEORGE KEREVAN
Published on 02/03/2013 00:00

THE real news about Britain’s banks is not bonuses or the fact that both RBS and Lloyds made technical losses last year while getting their balance sheets in order.

Rather it is the fact that the domestic banking market is flat because the economy is stagnating. January saw mortgage approvals drop unexpectedly despite the Bank of England throwing cheap money at the high street banks to pass on to customers.

However, you have to read deep into the verbose prose of the Lloyds’ annual accounts (much prosier than the “chastened” RBS version) to find out that the bank’s retail advances fell by 3 per cent in 2012. The increase in core operating profit is due to cost-cutting. That’s fine as it goes, but there is only so much meat you can cut off before you get to the bone.

The same goes for RBS which actually saw a savage 10 per cent drop in retail income with a consequent 6 per cent fall in profits in its core retail division. RBS puts this down to customers lowering discretionary spending, especially on credit cards. Message: in a stagnant economy (and likely to stay so after the Budget on 20 March) there is no room for any retail bank to expand, except at the expense of competitors.

This reality will continue to weigh heavily on bank shares. There are intimations that the UK government may start selling some of its 39 per cent stake in Lloyds if the share price hits 61p – the level at which the Treasury bought in 2008.

But the shares have been wallowing in the low 50s lately and unless the economy shows a rebound in the second half of 2013, I can’t see it making the starter’s gate.

Bookies proving a good bet in online world

IT’S always interesting to see how the bookies are faring. William Hill, Britain’s biggest bookmaker, is raising £375 million in a rights issue (with an attractive 39 per cent premium) to buy full control of its online gaming business from software maker Playtech.

William Hill is familiar through its 2,000-plus betting shops but it has no intention of going the way of HMV and other high street retailers who didn’t move fast enough to follow the migration of customers to the internet. Arch rival Ladbrokes has just bought Betdaq, the Irish online betting exchange, for £25m.

William Hill shares have doubled in value in just 12 months. No wonder. Revenues for 2012 are up 10 per cent, operating profit is up 18 per cent, and profit after tax is up 56 per cent.

Revenues from online betting are up 24 per cent and are already half the take from the high street outlets.

Yesterday William Hill was giving odds of 8/1 that Sunshine and Sweetie, the pandas at Edinburgh Zoo, will conceive a baby this year.

It must be spring.