City braced for big dip in banks' profits

BRITAIN's big four banks will bear the scars of the payment protection insurance (PPI) mis-selling scandal this week when they are expected to unveil sliding halftime profits.

• Horta-Osorio

Barclays, the taxpayer-backed Lloyds Banking Group and Royal Bank of Scotland, along with HSBC, are all expected by the City to show a more gruelling six-month period, with additional pressures mounting on the major high street players from severe financial pressures among the eurozone fringe countries.

Lloyds, under new chief executive Antonio Horta-Osorio, is expected to report an interim pre-tax profit of 1 billion on Thursday, a 600 million slump on its performance at the halfway stage in 2010.

Lloyds has put aside a massive 3.2bn provision against PPI mis-selling, the biggest of any of the big banks, as Horta-Osorio aims to draw a line under the problem.

The market will be looking for an update on the group's bad debts, particularly as the group's exposure to the troubled Irish economy led to a 4.3bn hit last year.

Horta-Osorio is expected to deflect questions about which suitors are left in the running for the 600-plus branches Lloyds has been ordered to sell. Sources say three players have made it through to the second round of bidding for the assets, which are expected to fetch between 2bn and 3bn. They are NBNK Investments, the Co-operative Bank, and entrepreneur Hugh Osmond's private equity group, Sun Capital.

It is understood Sir Richard Branson's Virgin Money and National Australia Bank, owner of Clydesdale Bank, have ruled themselves out.

Analysts expect RBS to report an operating profit of 750m and a loss before tax of 500m. However, Stephen Hester, RBS chief executive, is likely to point to further progress in shrinking the bank's non-core asset base. RBS has made a provision of 850m to cover costs of PPI mis-selling.

RBS is also expected to say its Irish market remains problematic, having announced a 1.3bn bad debts hit from Ulster Bank last year. Barclays, which has flagged up a 1bn provision on PPI, is set to reveal a 24 per cent drop in profits to 1.8bn on Tuesday, partly as a result. It is also expected the downward trend late last year at its investment banking division Barclays Capital has continued in its first trading half.

HSBC starts the reporting of the Big Four tomorrow, with a consensus profit forecast of 6.6bn, down from 6.8bn in the same period last year. HSBC has made the lowest provision against PPI, a charge of 270m.