Eric Daniels, the boss of Lloyds Banking Group, was widely criticised when he said in August that its bad debts had peaked. He was accused of trying to save his skin after overseeing Lloyds TSB’s controversial rescue takeover of HBOS, destroying billions of pounds of shareholders’ money in the process.
But it seems that Mr Daniels may have been right. Even Royal Bank of Scotland, amid the devastation caused by its acquisition of ABN Amro, said last week there were glimmers of hope.
Now HSBC and Barclays say they believe things are better than previously expected at this point in the cycle and suggest that loan losses are beginning to ease.
Barclays now expects bad debts to peak by the end of this year or early next, while HSBC said that impairment charges had fallen to their lowest level for more than a year in the third quarter.
Particularly striking for HSBC, was the first fall in bad debts at its US consumer finance arm for three years. HSBC’s shares rose sharply, perhaps as investors saw the end of the nightmare that has been its Household acquisition in the US, allowing them to focus on its opportunities in emerging markets.
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The market reaction to the figures from Barclays was more grudging. Barclays hit pre-tax profit forecasts of £1.5 billion for the last quarter and celebrated by restarting dividend payments at a modest 1p a share. Its balance sheet is looking a great deal less scary, too.
But Barclays Capital’s extraordinary growth over the past few quarters, fuelled by the bargain basement purchase of Lehman Brothers in the US, has slowed. Given that Barcap generates more than a third of group profits this is giving investors pause, after the dramatic recovery in the share price this year. It is hard to see how the near-perfect market conditions for investment banks earlier this year can continue much longer. Governments and central banks around the world are not about to withdraw the support that has buoyed up financial markets and underpinned bumper investment banking profits. But they are at least starting to think about it. Meanwhile, those bumper profits will at some point be squeezed by regulatory action.
Barclays also has some tricky decisions to make on bonuses this year. But at least it is in a better position than rivals, on both sides of the Atlantic, that took large dollops of public money.