Banking Profits

Finance

As anticipated, the profit statements which have now been issued by the leading banking institutions show that there has been a very, general increase in profits during the year, although, also as anticipated, the banks have in every case simply retained the dividend distribu- tion at the same level as a year ago. Nevertheless, the statements have been followed by a good deal of buying of bank shares and the yield at the higher level of prices is comparatively meagre, for the highest yield is somewhere about 8f per cent. and the lowest just over 3f per cent.

Before commenting, however, upon the character of the past year's business and upon the outlook for banking profits in the future, let us see what is the actual position as regards the increase in the profits and allocations to special funds and amounts carried forward for the past " year.- The first column in the following table shows the actual profit secured by each bank for the year, the second column shows the increase compared with the previous year, while the final column shows the increase in the amounts placed this year to special funds and in the amounts carried forward.

Profit.

£ Total increase in Increase. allocations to Special Funds and carry forward.

£ £ Barclays Bank • • 1,894,000 110,000 157,000 Martins

770,000 77,000 88,000 Westminster ..

1,731,000

347,000 District

490,000 70,000 38,000 Williams Deacon's

294,000 15,000 29,000 National Provincial

1,770,000 105,000 148,000 Lloyds

1,744,000 101,000 124,000 Midland

2,468,000 115,000 341,000f

£11,161,000 £593,000 £590,000

..1`4Comparison with -the profits of the previous year is-impossible because in 1935 the profit of £1,402,656 was declared after providing for the unknown amount represented by Centenary Bonus to Staff, Pensioners and Widows. It may be noted, however, that as com- pared with 1934 the profits for 1936 showed an increase of just over £203,000.

t Decrease—the decrease being due to the fact that while for 1936 there was an extra £100,000 placed to Special Funds,',a year ago a sum of £441,000 was allocated to Centenary Bonus, to Staff and Shareholders, and also a contribution of £20,000 to Bank Clerks' Orphanage.

INCREASING RESOURCES.

From the foregoing it will be seen that the aggregate increase in the profits for the eight banks set out in the table was £593,000, while the total net increase in the Allocations to special funds and the amounts carried forward was £590,000. Briefly stated, it will be seen that practically the - whole of the increase in the net profits has been used by the banks to strengthen their resources either in special funds or in the amounts carried forward to the new year. This in itself would seem to suggest that the banks feel it incumbent upon them, in the interests of their depositors—and, indeed, in the interests of sound banking generally—to take a prudent not to say a cautious view of the outlook.

A DIFFICULT PROBLEM.

During the past year there has certainly been some material increase in the Advances, the full extent of which has yet to be revealed, but in the case of Martins Bank, where the balance-sheet has been published, there is the very striking advance of £12,000,000, so that the ratio of advances to deposits now stands at 43.88 per cent. as compared with 38.61 a year ago. Moreover, in the case of Barclays Bank advances have risen by about £19,000,000, though I fancy that, generally speaking, the rise in Advances will not be found to have been proportionate to the rise in Deposits. And the bankers' problem of today is -to find a remunerative use for this great increase ift Deposits along lines consistent with liquidity in the balance- sheet. That is to say, the , banks, are desirous keeping as far as possible to the practice of using a large proportion of their deposits in Treasury and com- mercial bills and. in short loans tp the market. Today, however, the &Acuity -la to find employment on these lines on terms giving anything like a decent margin of profit. '"A :good' feature has undctubtedly' been the fact that where advances have increased they have been in directiofis witeie the recovery in industrial activity% and prosperity has required additional financial accommodation, and I should be inclined to attribute a considerable part of the increase in bankers' profits during the year to the almost complete absence of any bad debts. That, however, is not a condition that can be expected to continue indefinitely, for if bankers are to fulfil their function of financing the trade of the country the risk of a number of bad debts is ' some- thing which has always to be faced.

ABNORMAL CONDITIONS.

Moreover, a further point which the banks have to consider in shaping their future policy is the steady increase in working expenses due in part to staff demands while banks, like any other industry, .are also affected by the general rise in prices, to say nothing of rates and taxes. Given a continuance of the present trade activity, I think it is highly probable that during the current year there will be a further expansion in banking loans and also in banking profits, but on the other hand the banks have every reason to know that the trade revival is based in part upon the temporary influence of Government expenditure on the rearmament programme and that from such exceptional conditions may come a reaction later on. Bankers also have knowledge of the fact that they are carrying a larger proportion of their deposits in long-dated Government securities than is either customary or desirable. Given greater demand for loans the question will arise how' far some portion of the holdings of such long- dated securities can be gradually liquidated without involving a loss on the original purchase price.

PROSPECTS OF NEW CAPITAL.

Taking these and other factors into consideration, I am inclined to think that while bankers' profits may conceivably increase further during the coming year it does not at all follow that there will be an increase in dividends. Consequently the question arises whether the present prices for bank shares are justified. On the whole, I think that they are and for two reasons. In the first place, even if dividends are not increased the steady strengthening of banking resources gives confidence to the holders of bank shares in the steady=: ness of the dividends and in fact places the shares in the rank of high-class investments. In the second place, I should fancy that some at least of the present buyers of bank shares are actuated not so much by an expectation of higher dividends as of new shares offered on favourable terms. For I cannot help thinking that the great rise in deposits and the prospect of trade- expansion makes it desirable that banking capital should