Banks may see retail losses in second half

Britain's banks are likely to see their battered retail arms slide to a loss in the second half of 2009, as the cost of bad loans, tough competition and wholesale funding continues to weigh, a survey by accountants KPMG found.

"Retail banking is just profitable at lower levels, but with rising impairments. It seems probable that it will fall into loss making in the second half of this year" KMPG said in its UK Banks Performance Benchmarking Survey on Wednesday.

Barclays, Lloyds and Royal Bank of Scotland all posted profits from their UK retail arms in the first six months of 2009, but at far reduced levels, as they were hit by, among other factors, soaring bad debts.

Their bottom lines were instead lifted by investment banking operations that benefited from buoyant market conditions.

KPMG said it expected a positive effect to trickle through for retail and commercial arms as the lenders reprice their products to take account of higher funding costs and as prices stabilise, with margins improving "over the next two years".

But the survey gave a cautious outlook on bad debts, with retail and commercial impairments in particular expected to remain high "for the foreseeable future".

It also underlined a rising trend in unsecured impairments which include credit cards and loans and said this was not expected to peak before "2010 or beyond".

As for bad debts from the housing market, KPMG said the outlook remained uncertain, despite indications of a resilient housing market, and said unemployment levels would be crucial.

"Overall, mortgage provisions will be a key uncertainty for retail banks for the foreseeable future" the survey said. 

Lloyds Banking Group told investors earlier this month that its bad debts had likely peaked in the first half at a hefty 13.4 billion pounds largely because of its tough valuation of real estate assets badly hit in the credit crunch. Other banks, including RBS, have said it is too soon to call the top.

For the full survey, please see www.kpmg.co.uk.