THEIR CUSTOMERS complain about them, but among their investors, British banks are as popular as ever. Banking shares have bucked the downward trend in the wider stock market, oblivious to the risk of a recession in the UK and to the curb on domestic consolidation that would follow the Government's likely block today to a merger of Lloyds TSB with Abbey National. How long can banks have their day in the sun?
Banks got into terrible difficulties during the recession of the early 1990s, so it is odd that their shares are now regarded as safe havens. In the late 1980s, banks bent over backwards to gain ground in the lending market. Barclays famously launched a rights issue to help fund its strategy of becoming, in market share terms, "number one by 91". When the economy went into reverse and interest rates hit double digits, some banks nearly went bust, crippled by billions of pounds worth of bad loans, largely to the commercial property sector.
We are probably not on the verge of anything similar today. Even so, the crowd of cranes in London is consistent with a speculative boom in commercial property. Some of this is funded by equity, but not that much. Profit warnings are a daily occurrence, and announcements of job losses equally frequent. Meanwhile, it looks increasingly possible that the next movement in interest rates could be up. Economic growth in the UK is slowing, with the Treasury forecasting 2.5 per cent this year against 3.0 per cent last year. Year-on-year consumer credit growth, while not at 1980s levels, is in double digits. And for all banks' claims about being more prudent in their lending, generous cash-back mortgages remain common.
Yesterday, the Confederation of British Industry warned that business volumes in financial services "had unexpectedly stopped growing", with overall profitability suffering its first decline in six years.
So why are banking shares trading within 90 per cent of their all- time highs? Robin Down, banking analyst at Morgan Stanley, says that troubles in other sectors have highlighted banks' long-term track record of revenue stability. Leave aside the last recession and the 1998 banking crisis, and revenues in banking do not see massive shifts on an annual basis. But he urges caution.
"It sounds odd to refer to the banking sector as defensive. People only get worried if it looks like there will be a bad credit situation, and the view so far has been that we'll see only a couple of bad quarters. But I'm not sure that the defensiveness is justified," he warns. "Defaults are always a lagging indicator."
True, bad debts, at 0.5 per cent of overall lending, are below the through- cycle average of 0. …