UK bank earnings fuel talk of recovery

LONDON — HSBC Holdings PLC and Barclays PLC shrugged off the near-collapse of Britain’s banking system to report combined profits of more than 5 billion pounds ($8.4 billion) on Monday, fueling talk of financial recovery and raising fears of a return of the banking bonus culture.

The solid results from the pair, which shunned a government bailout at the height of the crisis last year, inspired an across-the-board rise in banking stocks.

“It may be that we have passed, or are about to pass, the bottom of the cycle in the financial markets,” said HSBC Chairman Stephen Green.

HSBC, Europe’s biggest bank by market value, posted first-half net profits of $3.35 billion, a 57 percent fall from a year ago — but better than expected by analysts.

Barclays earnings for the same period came in at 1.89 billion pounds ($3.19 million), a 10 percent rise that was slightly under expectations but still accepted by investors as respectable given the difficult economic backdrop.

Both banks doubled their profits in investment banking, gaining from a recent rise in share markets around the world and helping offset higher impairment charges for bad loans.

Pretax profit at Barclays’ investment banking and securities division jumped to 1.05 billion pounds, boosted by the acquisition of the North American business of bankrupt U.S. investment bank Lehman Brothers.

Impairment charges for bad loans rose sharply at both banks, up 73 percent to 3.9 billion pounds at Barclays and 39 percent to $13.9 billion at HSBC.

HSBC, which launched the biggest cash call in British history with a 12.5 billion pound rights issue in March, was hit particularly hard by its exposure to the U.S. retail market. It reported a pretax loss of $2.9 billion pretax loss in its U.S. Personal Financial Services unit, where it has shut down its Household International Inc. consumer lending operation.

Barclays, which raised 7 billion pounds from private investors in the Middle East rather than accept government money, booked impairment charges of 1.98 billion pounds in its retail and commercial division.

But analysts said that investors were in the mood to focus on the positives after a recent round of upbeat second-quarter earnings updates in the United States.

“In terms of the economic figures that are coming out both in the U.S. and the U.K. it is increasingly pointing towards the fact that we are probably passed the worst of the recession on both sides of the pond,” said Richard Hunter, head of UK equities at Hargreaves Lansdown.

Barclays stock jumped 6.4 percent after the reports, while HSBC rose 4.9 percent. Royal Bank of Scotland picked up 5.7 percent and Lloyds lifted 2.1 percent. RBS reports earnings Friday and Lloyds reports Wednesday.

Yet Hunter also cautioned that it was “early days,” with nationalized mortgage lender Northern Rock and part-taxpayer owned RBS and Lloyds expected to report gloomier figures because of their greater exposure to retail markets.

Some lawmakers also worry that Monday’s positive results will have little impact on the wider economy if banks won’t lend more to businesses. And there are also concerns that stronger earnings could encourage the bonus practices that fuelled excessive risk and helped cause the crisis in the first place.

HSBC and Barclays were among several major banks summoned by the government last month to a meeting where they were taken to task by British Treasury chief Alistair Darling for not doing enough to reduce the cost of loans to small businesses.

“The rates charged by lenders is doing terrible damage to the British economy and ultimately the banks themselves,” said Vince Cable, the leader of the opposition Liberal Democrat Party. “It’s ultimately a very short-sighted and selfish approach.”

The government and regulators have pledged to rein in excessive pay, seeking to appease taxpayers who stumped up for the 37 billion-pound bailout of the banking sector last October. But no new laws have yet been put in place.

The Centre for Economic and Business Research expects some 4 billion pounds to be paid out in bonuses this year, a 21 percent increase on last year despite the worst financial crisis to hit in decades.