'Big Five' bank pounds 21bn despite squeeze on mortgage margins; IN ASSOCIATION WITH Rensburg Sheppards Profits continue to rise as customers wait to hear charges decision.

Byline: BY RUSSELL LYNCH Daily Post Correspondent

THE UK's "Big Five" banking giants delivered a profits haul of more than pounds 21bn this week despite facing stronger headwinds during the first half of the year.

The major players are battling in an environment of fiercer competition, while rising interest rates throw the spotlight on credit quality at home and abroad.

Meanwhile, refunds of overdraft charges running into hundreds of millions of pounds have added to the pressure, as eight UK banks face legal action from the Office of Fair Trading in a case that is expected to resolve the high-profile issue following complaints from thousands of customers.

Despite the profits increase, all the banks have seen mortgage margins squeezed as competition between lenders becomes more intense.

HSBC, the first of the big banks to report, described the domestic personal finance market - accounting for up to 7% of group profits, or around pounds 490m - as a "highly challenging operating environment".

Lloyds TSB also reported tighter margins, although Halifax Bank of Scotland (HBOS) added to problems by blundering on pricing earlier this year. Its share of new mortgages plummeted when the bank failed to offer competitive rates to existing customers coming to the end of fixed-rate deals.

HBOS's misjudged attempts to increase mortgage margins contrast with rival lender Northern Rock, which failed to react quickly enough to the Bank of England's recent spate of interest rate hikes.

It was good news for borrowers who landed cheaper deals, but not so clever for shareholders after Northern Rock said net interest income from mortgages would be pounds 200m less than expected.

HBOS, the UK's biggest mortgage lender saw retail profits fall by more than 8% to pounds 1.04bn.

While confident of recovering its new mortgage share, HBOS also noted: "The mortgage market has gone through a significant structural change in the last year, which has seen declining margins."

While Barclays said mortgage growth helped its high street banking business increase profits pounds 51m to pounds 651m and saw balances grow to pounds 65bn, the bank also said that margins were reduced.

The major players have sought to tighten up the quality of lending, although impairment losses have been another notable feature this week.

Although Barclays and Royal Bank of Scotland (RBS) bucked the trend with falls in group impairment losses, down 9% to pounds 959m and down 2% to pounds 871m respectively, Lloyds TSB's rose 5% to pounds 837m, and HBOS increased 11% to pounds 963m.

But HSBC topped allcomers after unveiling bad debt charges more than 60% higher at EUR6.35bn (pounds 3.1bn) compared to the first half of last year. The bank's problems have stemmed from the exposure of its US business to rising default rates from the sub-prime mortgage market in the US, which came to light in February after the bank's first-ever profits warning.

Barclays has also been touched by the problems in the States, although overall group profits strode 12% ahead to pounds 4.1bn.

Overdraft charges shaved pounds 399m from the profits of the big five over the period - almost double the pounds 200m predicted by some City analysts - although claims have now been frozen until the outcome of the case.

HSBC reported the largest refund of charges - pounds 116m - although Lloyds TSB reported the smallest refunds at pounds 36m despite being the leader in the UK current account market.

Lloyds TSB was singled out for praise by analysts as one of the stronger performers of the week after the company raised its dividend for the first time in five years as a sign of the group's gathering momentum.

Collins Stewart analyst Alex Potter said: "Dividend growth is always a good thing, revenue growth was higher than predicted and they showed good cost controls as well."

Other experts said Barclays had been a strong performer despite the long-running sideshow of its battle with an RBS-led consortium bid to win Dutch bank ABN Amro, as the duo strive to pull off the world's largest banking takeover.

Mr Potter added that this week's results were a reflection of the leading banks' risk management skills and diversity of earnings in a tougher high street environment.

He concluded: "They have been through some lumpy events and come out with some pretty good results.

Lloyds TSB showed good cost controls as well

CAPTION(S):

Barclays and RBS - locked in bid rivalry to take over leading Dutch bank ABN Amro; HSBC - EUR6.35bn in bad debt charges; HBOS was slow to offer competitive rates and lost share of new mortgages earlier this year