How can UK banks keep growing

"Banking really is big business," says Graham Searjeant in The Times. Just look at Northern Rock, Britain's ninth-biggest bank. Last month it delivered pre-tax profits of £387m for 2003, up 19% on the year before. It seems that all the doubts that once held down the company's shares were either mistaken or "wildly premature". Northern Rock has not lost out to bigger banks that can tailor products more effectively. Margins have not "melted to nothing in the white heat of competition". Nor has the housing market collapsed "leaving borrowers with tumbling prices and negative equity and lenders with repossessed homes and bad debts". In other industries this kind of story would make the mortgage specialist "a leading aristocrat". But "in a less spectacular form a similar story" could be told of most UK banks. Indeed, it could, says Howard Walker in The Journal. Barclays has also delivered fairly splendid results, with pre-tax profits up 20% to £3.84bn. And over the remainder of the month analysts expect the other retail banks - Lloyds, Royal Bank of Scotland, HSBC and HBOS - to announce another £21bn of profits between them.

Expect more of the same in 2004, says Heather Connon in The Observer. The housing market may slow, but money can still be made by encouraging consumers to remortgage - Commerzbank is even predicting a boom in mortgage lending this year as rising prices mean that new buyers will have to borrow even more per move than last year. And even if lending demand does falter, rising rates (as long as they don't put borrowers off) mean the banks can boost margins by increasing borrowing rates faster than savings rates. Anyway, lending demand isn't showing much sign of faltering, says the Investors Chronicle. Rates and unemployment are still historically low, so people "feel confident". They are certainly not taking the "wise advice" of Barclays' chief Matt Barrett and cutting back on their credit-card spending, says Graham Searjeant: operating profits at Barclaycard were up 17% to £722m last year.

There's risk inherent in those profits, says the Evening Standard. The Consumers Association has accused the banks of "exploiting their stranglehold over the high street" to make excessive profits. What if the Government intervenes to stem these? Even if this doesn't happen there are tougher times ahead, says Jason Nisse in The Independent on Sunday. Last week's interest-rate hike and "some alarming personal bankruptcy statistics" show that the UK consumer, who has been the engine of growth and profitability for years, may be facing "a little local difficulty". And if the banks can't make their money "milking the good old British retail customer", how will they find growth instead?

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There are a few possibilities. They could board the "corporate gravy train" - raising finance for big firms. But foreign investment banks carved up this market long ago. Of our banks, only Barclays is any good at it. RBS dabbles and HSBC makes periodic attempts, but they tend to "end in tears". Otherwise, they can "find some suckers abroad". HSBC has a history of making money in far flung places and RBS has a franchise in the US. But none has a real foothold in Europe. Most of them are looking, but history suggests they will "come a cropper". The final alternative is to "milk the cow harder". All the banks are trying to draw custom from their rivals, but "even dancing bank managers" can't tempt most people away from the abusive relationships they have with their main banks. Lloyds TSB's new boss, Eric Daniels, thinks he can grow by getting more from the ones he has. But this is a "difficult task", hence the large sum he has just spent on new customer relationship software. Banks may look reasonably valued, but "where's the growth"?