Record bad debt provisions expected: Property lending, loans to companies and defaulting borrowers will share the blame for the banks' disasters, says Peter Rodgers

THE BIG FOUR clearing banks are about to set aside a record pounds 5bn from their profits for bad debts, pounds 600m more than in 1991. This will bring the total in the three years of the recession to more than pounds 12bn.

The appalling results, the worst the banks have ever reported, will overshadow the impact on profits of the Third World debt crisis in the 1980s and will increase fears that the banks will raise charges faster than ever.

But some analysts believe competitive pressures and the effects of the recession will make this more difficult to achieve. With bad debts likely to fall only slowly in 1993, bank profits are likely to be under pressure for at least another year.

There were rumours last week of rights issues by banks over the next month, but any attempt to raise money from shareholders after such a poor performance will risk a bad reception. The blame for last year's disasters will be put on provisions on property lending, loans to large and especially small firms and large numbers of defaulting retail borrowers.

Several billions of the costs will be cushioned by tax relief on bad loans, which the banks set against their profits.

Although banks' operating profits before bad debts have been buoyant in recent years as fees, charges and margins have risen, analysts have detected signs that this trend may be weakening and that the banks' underlying profits growth is now less healthy.

Lloyds Bank, which begins the series of announcements on Friday, is expected to make several tens of millions more than the pounds 645m profit before tax it revealed in 1991.

But after years as the City's favourite clearing bank because of rapid growth in earnings per share and a concentration on selling insurance, there is a growing belief that Lloyds' underlying performance will be disappointing.

A likely improvement in pre-tax profit is thought to be due to a slowing down of bad debts. Lloyds may also make a further modest write-back of provisions against Third World countries.

Last year it disclosed surplus provisions of about pounds 900m based on market values of Third World debt, but the bank's policy is to spread write-backs over a lengthy period, since Third World economies might deteriorate again rapidly.

Barclays is expected to provide about pounds 2.2bn for bad debts, but the City believes the risk of a dividend cut is receding and that any loss will be a small one.

Midland, now part of the HSBC Holdings group, is thought to have made about pounds 150m before tax after more than pounds 700m bad debt charges, compared with pounds 36m pretax profits in 1991. Analysts estimate the HSBC group as a whole could make about pounds 1.6bn before tax.

NatWest provisions are estimated to be about pounds 1.8bn, down slightly on the previous year, with pre-tax profit of pounds 400m compared with pounds 110m in 1991.