Surging UK shares draw support from bank profits

First half profits of Britain's "big four" clearing banks increased 18 per cent to £4.16 billion, providing some support for surging share prices in the financial sector despite the prospect of increased competition.

Interim dividend increases range from 10.4 per cent at NatWest to as much as 26 per cent at Lloyds TSB, consolidating its position as Britain's most profitable clearing bank. The banks' interim "dividend season" ended on Thursday with Barclays unwrapping an eight per cent increase in first half pre-tax profits to £1.38 billion before one-off charges of £105 million on finance leases. Shares in Barclays soared 117p to 1,444p on the better-than-expected figures, accompanied by a boardroom pledge to spend £700 million on shares this year, an increase of £200 million on earlier projections. Barclays chairman, Mr Andrew Buxton, said the "main driver" behind interim profit growth has been the UK bank which had done "extremely well" in all areas. Also, its investment banking business, BZW, suffered only a marginal profit decline in sharp contrast with the profit collapse at NatWest Markets, partly caused by losses suffered through mispricing in derivatives trading. Strong growth in profits at Britain's banks mainly reflects the benign combination of strong economic growth and low inflation together with maintained interest margins on increased lending, particularly on credit cards. Post-tax returns on equity has continued to improve. Lloyds TSB's return on equity has reached as high as 40 per cent, a rate of return enjoyed by few, if any, of its business borrowers. Lloyds TSB has indicated its anxiety to deploy some of its mounting capital by further forays into the takeover market.

Its acquisitions of the TSB and Cheltenham & Gloucester Building Society have been highly successful and additional "bolt-ons," possibly in the life insurance field, are being considered.

Barclays' decision to increase its share buy-back programme to £700 million provides further recognition of the sector's excess capital. The surge in bank shares during the present phase of the bull market looks to be discounting continued levels of bumper profits without too much concern for increased competition attracted by the prospect of high returns on capital. With growth in competition will come this year's crop of building society conversions involving the Halifax, Woolwich and Alliance & Leicester.

Not to be ignored, however, is the new competition coming from "tele-banking" services being formed by the likes of Mr Richard Branson's Virgin group and the plethora of "in-store" banks being formed by supermarket groups, notably Sainsbury's and Tesco's.