The Banking Half-Year

Further Fall in Deposits Total

NOBODY expected that any of the " Big Five " banks would find any cause to alter their interim dividend rates, and, in tact, no changes have been made. On the other hand, Martins Bank, with its large interests in Northern industry, is fulfilling expectations in raising its interim from 7 to 71 per cent., the rate to which last year's final was increased. Thus, the annual dividend rate of this bank may now be regarded as on a 15 per cent. basis. Advances have risen sharply from £42,665,168 to £46,462,084 over the twelve- months' period to June 3oth, 1939, and unlike most of the London banks, Martins has actually weathered the political storm with its deposits total unimpaired. Deposits have risen by roughly it,000,000 to £98,376,473, with the result that the ratio of advances to deposits is about 31 per cent. higher at 47.2 per cent.

It is a pity that the banks do not oblige us with half- yearly earnings statements, but as things are one is forced back on the broad changes in the balance-sheets, plus an estimate of costs, as a guide to the trend of profits. If we turn to the key items in the banks' balance-sheets we can detect some at least of the major influences which have been at work. Movements in the totals of deposits, advances and investments are shown in the following tables:

Diavosrrs June 30th, June 30th,

1938

1939 Barclays... 436,030,566 428,072,569 Martins ...

97,523,347

98,376,473 Lloyds ... 401,652,302 396,422,231 Midland... ...

498,561,524

468,632,576 National Provincial 323,816,651 301,246,688 Westminster 360,205,902

341,717,335

2,117,790,292

ADVANCES June 30th,

1938

2,034,467,872

June, 30th,

1939

Barclays... 202,668,708 208,572,825 Martins ... 42,665,167 46,462,084 Lloyds 165,916,305

165,597,956

Midland 215,696,062

219,976,252

National Provincial 143,951,087 143,862,690 Westminster ... 133,352,668 736,757,541

904,250,027 921,229,348

INVESTMENTS June 30th,

1938

June 30th,

1939

Barclays...

102,440,814

103,355,649 Martins ...

31,898,109

30,588,748 Lloyds ...

106,263,441

107,051,299 Midland...

125,515,235

111,638,789

National Provincial Westminster ...

83,871,033 112,284,210 75,157,906

104,288,017

— —

562,272,842

532,080,408

Although the figures of the " Big Six " banks do not all conform to any rigid pattern—Martins for example, has avoided the contraction of deposits—die broad trend is clear enough. Deposits, as a whole, have contracted, the fall of over £81,000,000 reflecting the heavy efflux of foreign balances from the London money market during a year which has witnessed successive political crises. Parallel with the fall in deposits advances have expanded by £17,000,000, while the banks have cut down their invest- ment portfolios by over L30,000,000.

How far such a contraction of investments, which must have been an important influence on gilt-edged prices, has been necessary to pave the way for the expansion of advances is an open question, but it seems doubtful whether the banks' investment policy can be wholly explained on these lines. For one thing, since the advances total began to pick up from the low point reached last November, the rise in advances has been exceeded by about L13,000,000 by the fall in investments. I incline, therefore, to the view that the banks have been prompted to cut down their gilt-edged portfolios, partly because they have been prepared for a gradual rise in interest rates, and partly on account of the Government's Defence borrowing programme. Both these considerations must have influenced the banks to reduce their portfolios from the abnormal totals at which they have latterly stood.

It remains true, however, that banking policy has been affected in the past twelve months not only by the fall in deposits but by a fairly severe contraction in liquid assets. As the Exchange Equalisation Account has lost gold Treasury Bills have had to be transferred to it, and there is no evidence that the effects of these transfers have been wholly neutralised by central bank action. At the end of June the " Big Six's " cash reserves were over £30,000,000 less than at June 30th, 1938, and there were substantial falls in the other " quick assets," notably call money and short loans and discounts. At just over to per cent. the banks' cash ratio is again approaching the traditional minimum.

What are the implications of these trends for bank share- holders? They appear to be rather mixed, with the balance tipped slightly in favour of a higher level of profits. Earn- ings from advances, the most remunerative of the banks' assets, must have been higher than in the second half of 1938, though probably not materially different from those of the first. half of last year. One imagines, however, that industrial recovery will be reflected in a further rise in advances during the current six months. Against this favourable factor must be set the probability of lower net earnings on bill portfolios, unless the volume of Treasury Bills is expanded very considerably between now and the end of the year and, of course, a smaller income from invest- ments. On the other hand, provision for bad debts should again be quite modest, and it is fair to assume that the earn- ings of banks operating in the industrial areas will reflect the full benefits of trade recovery. Expenses, it is true, have risen, as heavy expenditure has been incurred for A.R.P., but it will be surprising if profits for 1939 do not covet existing dividend rates with a comfortable margin to spare.

CUSTOS.