All eyes on bank interims

As the interim reporting season for UK banks kicks off, Julian Cane, manager of the F&C UK Equity Income Fund, believes that the information to be released over the next couple of weeks will paint a clearer picture as to whether the worst is over for the sector.

According to Cane one of the main issues people are going to be looking at is what the banks will be saying about their treasury assets - including CDOs and other exotic instruments. "We have seen Merrill Lynch announcing the sale of part of their exposure to this type of instruments at 22% of face value and people wonder whether some UK banks will follow the same route," he said.

"We will also look at what is happening to bad debt related to traditional banking activities such as mortgages and unsecured loans to individuals." Cane added: "Up to this point bank losses have come from the treasury assets side but we are now getting to the point where, as the economy weakens, bad debt related to the more traditional banking cycle will start causing more pain."

The reporting season will also reveal the banks' forecasts for their own businesses and the economy as a whole. "It will be interesting to see what the banks think about their own outlook, capital positions and the broader economic environment," he explained. Lloyds TSB, that reported worse than expected results on Tuesday, was quite optimistic, predicting a slow down as opposed to a recession.

"This reporting season will give us a lot of information about the 6 to 12 months outlook for the sector," he said. "On balance we are still very cautious about the UK banks and we remain underweight. However, we are not adverse to change if we see clear signs that things are really getting better."

For more information, visit fandc.com