Newspaper article The Evening Standard (London, England)

Bounceback for Bank Shares Can't Disguise Parlous State of Wider Economy; ECONOMICS ANALYSIS

Newspaper article The Evening Standard (London, England)

Bounceback for Bank Shares Can't Disguise Parlous State of Wider Economy; ECONOMICS ANALYSIS

Article excerpt


BRITIsh banks are preparing to update the market on trade in the first three months of the year amid signs the worst of the financial crisis could be over. Rivals in the Us this month reported first-quarter results largely free of nasty shocks, although news today that Citigroup and Bank of america may need to raise new funds could hit confidence.

Back in the UK the full nationalisation of lloyds Banking Group, Royal Bank of scotland and Barclays seems to have been averted at least for now and shares in UK banks have rallied strongly as a result, albeit from a miserably low base.

so there is reason to hope that it could be the most upbeat set of reports for some time and the City is looking for a strong performance from Barclays in particular on 7 May driven by profits in investment banking and fixed income.

however, any shocks could send share prices tumbling and banks are still making heavy losses on bad loans and toxic investments. as australian-owned Clydesdale and yorkshire Banks showed today, although the banking crisis may be easing, the crisis in the real economy is getting worse:

Mortgage arrears

A key indicator will be the number of households struggling with mortgage repayments.

The Council of Mortgage lenders is forecasting 4.4% of mortgages to be more than three months in arrears by the end of the year driven by rising unemployment.

That amounts to 500,000 households and is more than double the 219,000 in arrears at the end of 2008.

Northern Rock last week said arrears have soared by 25% in the first three months of the year to 22,000, or 3.67% of its loan book, and figures from spanish bank santander will tomorrow show the extent of the problem at abbey, alliance & leicester and Bradford & Bingley. The number of arrears at abbey jumped nearly 40% last year to 10,897.

lloyds will also take a sizeable hit, not only from its own customers but also those taken on when it rescued halifax owner hBOs, the biggest mortgage lender in Britain. The Government is desperate that this does not transfer into repossessions, particularly with a general election looming, and has urged banks to support troubled borrowers.

Negative equity

Analysts at sanford C Bernstein reckon falling house prices mean 1.8 million households will be in negative equity by the end of 2010, double the current level and more than the 1.3 million in the housing crash of the early 1990s. The losses to the banks are likely to be limited by low levels of house purchase at the peak of the market and relatively low loan-tovalue ratios during the past decade compared to the late 1980s. low interest rates have also encouraged borrowers to payoff large amounts of equity and helped reduce outstanding debt.

Barclays is likely to fare better than the rest, with 10% of mortgages by value in negative equity by the end of next year against 25% at RBs, 30% at

lloyds and more than 50% at taxpayerowned Northern Rock. …

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