Battered British Still Look to Key Role in Europe

By Evans, John | American Banker, July 26, 1991 | Go to article overview

Battered British Still Look to Key Role in Europe


Evans, John, American Banker


Battered British Still Look to Key Role in Europe

When Britain deregulated its financial markets in 1986, banks scrambled madly to expand into securities and other previously restricted areas.

But these days, Big Bang has withered to big bust. Amid a deep recession, Britain's real estate lenders are mired in crisis, and sour corporate loans are spiraling. The result: British bankers have chucked their go-go game plans and are racing, instead, to slash costs and dig up new sources of income.

At no time since World War II has "the international banking industry faced as many uncertainties as it does today," said Sir John Quinton, chairman of Barclays Bank, Britain's largest.

To be sure, there are some positive signs. Some experts say adherence to international capital standards are forcing more-focused strategic approaches. Tamer interbank competition is gradually pushing lending margins higher. And British banks remain determined to assert themselves after 1992 as major players in the European Community's unified financial market.

Not the Best of Times

Nonetheless, these are hardly the best of times for British banks. Numbers illustrate this point.

This spring, Midland Bank PLC and Standard Chartered PLC cut their dividends for 1990. These marked the first such reductions since the Great Depression of the 1930s.

Those two banks - along with Barclays Bank, Lloyds, and National Westminster Bank PLC - last year posted combined trading profits of $12.4 billion, down 5.3% from $13.1 billion in 1989.

After huge provisions for souring domestic business loans, after-tax profits by the five banks slumped to $2.31 billion.

That figure was higher than aggregate earnings of $850 million in 1989, when the British banks wrote off large chunks of Third World debt. But it was off 60% from profits of $5.71 billion in 1988, a figure that offers a truer earnings comparison.

Restoring Margins

In a key response to eroding profitability, British bankers are working to restore net interest margins. From a high of 5.6% in 1986, this indicator plunged to 4.7% in 1989 and 4.2% last year.

Nonetheless, because of declining competition among banks, "there were definite signs of a widening in lending margins" in the second half of 1990, the Bank of England said.

In recent months, small businessmen claimed that Britain's large banks hadn't passed along to them reductions in the country's prime rate. But last month, a government investigation concluded the banks hadn't acted improperly.

Currently, prime stands at 11%, off from a 15% high last October.

Lord Alexander, National Westminster's chairman, also noted that the Basel capital standards "are driving the pricing of business to personal and corporate customers to more remunerative levels." The Basel standards require banks to increase their capital-to-asset ratios to 8% by the end of 1992.

Layoffs Are Due

Additional fallout from industrywide retrenchment is expected to come in the form of massive layoffs. In the next few years, labor unions estimate, 50,000 people in the banking and insurance industries - some 5. …

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