With stunning results last week from US banking giant Goldman Sachs, Kelly Macnamara wonders if the boom and bonus days of the banking sector had ever gone away.
As the season for bank results gets under way, there are signs that areas such as trading in currencies, fixed income and commodities have insulated firms at a time of the deepest global recession since the war.
Goldman racked up second-quarter profits of $3.44 billion - way above expectations - while fuelling concern about a swift return of the bonus culture amid a 47 per cent increase in pay and benefits.
The UK’s leading banks will report figures in early August, with Barclays the most likely to show a Goldman style boost from activities far removed from traditional high street banking.
Most, if not all, banks are expected to show higher levels of bad debts, not least part-nationalised Royal Bank of Scotland and Lloyds Banking Group as a result of reckless lending practices of the past.
The latter is tipped to write off up to £13 billion on commercial property, business and mortgage loans turned sour.
Many banks, most notably Halifax Bank of Scotland (HBOS), lent big sums to finance leveraged deals, but the assets they backed are now worth a fraction of their former value.
And it is at HBOS - which Lloyds rescued in a merger at the height of the banking crisis - where the newly-formed bank’s serious bad debts are expected to lurk.
HBOS bad debts on the corporate side were £6.6 billion last year after its riskier property loans were reassessed by its more prudent parent.
The group’s Bank of Scotland arm lent more than £850 million to Admiral Taverns, which owns more than 2,000 pubs, in order to finance a string of acquisitions.
But as the downturn in the property market struck, the value of the estate crumbled, causing an estimated write-off of around £450 million - one of the biggest hits on the bank’s beleaguered balance sheet.
Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers said the acquisition of HBOS was the beginning of “a tale of woe” for Lloyds.
He said that while banks were now focused on building up their credit buffers and eschewing potentially risky debts, there were still concerns for the industry.
“If this Lloyds speculation turns out to be correct there could be some reasonably ugly news coming through,” he said.
The results are also likely to be deeply affected by the banks’ restructuring efforts - in particular redundancy costs - as the state-owned banks take dramatic steps to downsize their businesses.
Lloyds is also faced with the further challenge of integrating its HBOS acquisition.
Unions decried the 1,200 job cuts at the bank this week as “Groundhog Day” because of the number of redundancy announcements made by the company. Unite estimates 8,200 staff have now been told they are losing their jobs this year.
Meanwhile, tens of thousands of RBS staff have lost their jobs as a result of the hammering the firm took in the financial crisis.
RBS has warned its bad debts could soar to almost £12 billion this year.
A surge in bad debts, along with trimmed margins from record low interest rates, meant it posted a loss of £44 million in the first quarter despite record income from its investment banking business.
The bank posted a £24.1 billion loss last year - the biggest in UK corporate history - after writing off more than £16 billion from its catastrophic takeover of Dutch bank ABN Amro.
Lloyds and RBS are 43 per cent and 70 per cent owned by the Government respectively, but this will rise to 62 per cent and 84 per cent due to extra shares issued under a scheme to insure the banks’ toxic debts.
And as UK Financial Investments (UKFI) - the body charged with managing the Government bank stakes - indicated this week in its first annual report, there will be no quick fix for the two banks.
Acting UKFI chairman Glen Moreno said: “Make no mistake - this ain’t over yet. We are a long way away from normalcy in the world’s financial markets.”
As UKFI made very clear, it is in the interests of the whole country that the two banks get back on their feet.
So far the taxpayer’s £34.5 billion investment in bailing out Lloyds and RBS has shrunk in value to £23.6 billion - a 32 per cent paper loss of £10.9 billion as of June 30.
This equates to a paper loss of almost £1,000 for every household in the country, according to UKFI.
Mr Hunter said credit write downs have mostly been dealt with by banks and it is now the areas traditionally seen as a concern in a recession - individual and company loan defaults - that will come under the spotlight.
As a result he said the banking results will be viewed as a “barometer of the economy generally”.
Another key sign on the state of the economy - and hopes for recovery - will be the amount of lending banks are doing and how affordable those loans are to consumers.
Banks eager to rebuild their balance sheets have reined in lending in recent months. They have also been rigorously focused on margins.
Earlier this week it emerged the mark-up charged by lenders on fixed rate mortgages had reached a new high despite falling funding costs.
The average rate for a two-year fixed rate mortgage is now 5.16 per cent after a flurry of lenders hiked the cost of their deals.
Meanwhile, another cloud hanging over RBS and Lloyds has swept across the channel from the European Commission.
Comments last month from Neelie Kroes, the European Commissioner for competition, raised fears the banks could be broken up.
EU rules were waived to allow the UK Government to step in with rescue cash, but Ms Kroes warned “banks cannot be rescued forever”.
She said RBS grew to be “too big to supervise, too big to operate, too complex to understand and highly dangerous to the European Single Market” and indicated the bank needed to be restructured.
In the case of Lloyds, any move to undo its HBOS acquisition would be highly complicated for the bank, which is already well on its way to absorbing the troubled lender.
And UKFI has already said it will take several years for it to extricate itself from its banking investments, selling shares in parcels rather than trying to offload the mammoth holdings in one go.
UKFI said it would take a hands-off approach to managing the banks, but its recent decision to waive through a potential £9.6 million pay and bonus scheme for RBS boss Stephen Hester led to fears that it was not cracking down enough on boardroom pay.
Mr Hester decided to defer part of the award for two years after investor complaints.
When it comes to the winners in the banking world at the moment a look across the Atlantic suggests those that have escaped the financial turmoil relatively intact could go back to the huge bonus culture of the past - a culture blamed for the risky behaviour that led banks to the brink in the first place.