No relief yet for bruised British banks

By Steve Slater - Analysis

LONDON (Reuters) - Britain's banks made over 40 billion pounds ($79 billion) of profits last year, but they have seen twice that amount wiped off their market value since July and face a grim outlook.

With more writedowns and little growth in profits and dividends on the cards, investors are wary and analysts see no sign the turmoil is ending. They expect banks to suffer more hits on the value of assets tarnished by a global credit crunch and to significantly scale back asset growth.

"We were hoping to come out of this reporting season thinking we'd got to the bottom of a lot of areas, but that's not the case," said Colin Morton, fund manager at Rensburg Fund Management.

"It's obvious there will be more writedowns to come over the next three to six months and there are still substantial other issues for the foreseeable future."

The worst fears for the big banks like Royal Bank of Scotland (RBS.L) and Barclays (BARC.L) were not realized at recent results. There were no emergency fundraisings, capital positions were no worse than expected, and writedowns were generally less than seen at many U.S. and European rivals.

But capital positions for many, including RBS and Barclays, remain under scrutiny amid the threat of more industry losses. Most UK banks have less of a capital cushion than overseas rivals and that could keep investors cautious.

The risk of more writedowns also sprung up in unexpected areas. Britain's biggest mortgage lender, HBOS HBOS.L, surprised investors with news that it had 41 billion pounds in asset-backed securities exposure, and buy-to-let specialist Bradford & Bingley BB.L said it had the equivalent of a fifth of its market value in collateralized debt obligations.

Alliance & Leicester ALLL.L warned that higher funding costs -- further fallout from the credit crunch -- would take a 150 million pound bite out of profits, while the tone of outlooks across the sector was cautious.

"It's hard to find the positives. People are worried about how much worse it's going to get before it gets better," said Steven Hayne, analyst at Morgan Stanley.

"Valuations have come down a long way but it feels that it will get worse as a lot of the pain hasn't come through yet."

HBOS, whose shares have fallen 15 percent since its results, is "in the unfortunate position of being exposed to the majority of the market's current areas of concern," said analysts at UBS, including commercial property and mortgages and the quality of its treasury assets among its concerns.

Concerns about a deeply troubled bank that has yet to report -- Northern Rock -- has added to the pressure on smaller lenders raising cash in difficult wholesale markets, and contributed to the bad news from A&L and B&B that drove both down to all-time lows.

M&A ACTION?

The falls by A&L and B&B were cushioned though, by speculation that Lloyds TSB (LLOY.L) or another bank could step in to try to buy them at a knock-down price. Lloyds has said it will look at acquisitions.

As for LLoyds itself, analysts say the bank's lower exposure to risky assets and what its CEO termed a "good old fashioned banking" approach could see it outperform rivals in the coming months.