We have seen both Barclay's and HSBC Holdings report better than expected first-half results.
I give them credit for being the two great survivors of the U.K. Banking Crisis. They kept their independence through a combination of luck, cunning, guile, and skill. In the process Barclays actually stole Lehman.
Both banks banged out the lunch money with gains in trading and investment banking. Barclay's was able to double IB revenue from year ago levels helped by Lehman. HSBC had a roughly 66% increase in IB/trading related operations.
It was these robust results that helped these two specific banks absorb further hefty impairments and credit losses and still report healthy profits and improved capital ratios. Barclay's took a further 4.7 billion GBP hit on its structured asset portfolio, which further confirmed suspicions this was never adequately marked down in the first place. They reported a higher than expected impairment charge of 1.44% of loans in the first half. Yet earnings were up 10% from the first half of last year.
Meanwhile, HSBC reported first-half earnings of $3.7 billion, a major turnaround following its first-quarter loss. Losses at Household, the U.S. division in the process of being wound down, while still huge at $8.5 billion, were below expectations.
But there is no evidence that credit losses are gong to slow down anytime soon. It looks like European Banks like Deutsche/UBS/Barclay's/HSBC/Lloyds weren't aggressive enough in marking down problem loans. We heard earlier in the week the CEO of Deutsche stating that losses will get much worse going forward.
The great results in IB/Trading are not sustainable going forward and are volatile. So what we have here is inflated profits and continuing losses in credit. Not a good combination.
Historically investment firms with volatile trading operations had much lower P/E ratios compared to banks that didn't. Why should this time be any different?
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