Banking Profits
Finance
Au, the leading English joint stock banks have now published their statements of profits for the year 1935. Without exception, the results are equal to general expectations, but the point cannot, perhaps, be too strongly emphasised that the uniformity of the banks' profits is largely attributable not merely to prudent management, but to a conservative policy pursued over many years which has restrained directors from dis- tributing abnormal profits in abnormal times. Thanks to the building up of published and inner reserves, the joint stock banks have been enabled to maintain profits and dividends at a consistent level over a number of years.
PROFIT MARGINS.
Not, however, that the banks have failed to suffer from the years of special industrial depressiOn, and in 1931, especially, the profits of all the banks showed an appreciable decline from those of the year 1929. Even today none of the banks has got back to the level of profits of that year, and in some cases the shrinkage has been considerable, though. for the past five years, with few exceptions, the dividends have shown no change. During the year 1935 conditions remained unfavourable for the banks so far as the normal profit- earning activities were concerned. And by " normal " activities I mean the margin of profit offered by the difference between rates on deposits and the income obtainable from employment of the banks' resources in short-dated loans, the discounting of bills, and advances to trade and the Stock Exchange. For, as I have so often explained in these columns, bankers only employ a certain proportion of their deposits—repayable on demand—in long-dated securities.
As everyone knows, there has been a considerable increase in banking deposits during recent years and, if other things were equal, and allowing for the low_ rates paid on the deposits, this increase in deposits should have meant increased profit-earning power. Other things, however, have not been equal, and the banks have had to employ a great proportion of their resources in bills and short loans at rates scarcely higher than the rates given on deposits. Indeed, if the average rate on deposits throughout the country is taken into consideration, there can scarcely have been any profit margin between the rates paid on deposits and the rates obtained on bills and short-term loans.
LAST YEAR'S RESULTS.
1101V comes it, then, that amidst these conditions the banks as a whole should have been able to show a slight increase in profits for the past year ? In the case. of Barclays, for example,- there was an increase in profits of about 176,000 ; in the Midland an increase of about £60,000 ; in the case of the National Provincial about £20,000; only Lloyds have shown just a trifling decrease— and in that case it must be noted that the• increase. in t he preceding year was exceptionally large. In the case of the Westminster it is difficult to note the precise change in the profits owing to the -fact that the figure is declared after providing for certain bOmises referred to in a subsequent paragraph, but I should imagine that the published report will disclose that there was a slight increase in the profits.
LARGE INVESTMENT HOLDINGS. - There are two main explanations of the steadiness of banking profits. In the first place, it' has to be remembered i hat on very large amounts of money on current account I he banks pay no interest at all. In the second place, the banks of necessity have been compelled to employ a 'somewhat larger proportion than usual of their resources in British Funds and other gilt-edged securities. Here, of course, some margin of profit has been obtained over the general rate of interest on deposits, while it is also probable that advantage has been taken from time to time to realise profits on securities which have risen front __ the lower level at which they were purclu sed. At the same time, this high proportion of"investments and securities is not altogether a favourable feature of the present banking position, although it is probable that the holdings of the banks are in comparatively short-dated securities:: The fact remains, however, that whereas in 1929 the 'holdings of investments by the Clearing Banks was about £263,000,000, the total at the end of last Novem- ber was about £635,000,000.
It is probable, however, that whereas in the times of depression profits were eaten into by bad debts, the past two years have seen repayments of many of these debts, thus enabling the use of funds previously set aside to make good possible defaults. Moreover, in so far as there may have been excess provision in the past for contingencies, the banks have been in a position to make a favourable showing for the past year. How small, however, is the proportion of profits to the total liabilities of the banks may be gathered from the fact that in no instance does it amount to as much as 1 per cent. and, in many instances, the ratio is as low as per cent.
CENTENARY BONUSES.
In the case of two of the leading joint stock banks, namely, the Midland and the Westminster, it is pleasing to note that the occasion of the Centenary of those institutions has been marked by a Bonus both to the Staff and to the Stockholders. Both banks have declared a Centenary Bonus of 2 per cent. on the capital, a Bonus undoubtedly well deserved by shareholders, who, during the Centenary, have devoted so large a proportion of profits each year to the establishment of big reserves, thereby strengthening the position from the depositor's paint of view and also strengthening the entire structure of banking throughout the country. Both banks have also declared a centenary Bonus to their Staffs of 5 per cent. with a minimum payment of £10 and a maximum payment of £100. I am glad c1.3) to note that this Bonus has been extended to Staff Pensioners and Widows. In other words, the Directors have endeavoured to make the Centenary Bonus as retrospective as po sible. Extending, as it does, both to Widows and Pensioners, there must be many recipients who will have taken no small part in the progress of the bank over at least the last half of the century.
ARTHUR W. KIDDY.
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