Outlook: Bank bashing starts to match football as a national sport

Some MPs on the House of Commons Treasury Committee plainly thought they were in the presence of the devil himself when Matt Barrett, chief executive of Barclays, proudly announced that he regarded his primary function as that of making as much profit as he possible could. A good old bout of bank bashing was therefore only to be expected when the Treasury Committee finally came to publish its own report on the Competition Commission's report into small business banking. Yes indeed, banking is beginning to take over from where the beerage left off as Britain's most investigated industry.

In the event, the MPs' report was mercifully short, to the point and enlightened. The MPs rightly agree with the Competition Commission that small and medium-sized enterprises suffer from the dominance of the Big Four, but they find heavily against the price control remedy favoured by the commission as a short-term tonic. The Chancellor has already said he's going to implement this recommendation, which leaves him in a bit of a quandary.

The problem with price controls is the obvious one that it discourages new entrants and therefore reinforces the entrenched position of the Big Four. The Competition Commission wants the Big Four to be forced either to offer free SME banking or a competitive rate of interest on SME accounts. Force them to do that and you deprive rivals of a key competitive advantage in the market place. The practicalities of enforcing such controls would also beggar belief.

That, however, is all the support the Big Banks get. After that, it's pure vitriol. The banks are accused of making little or no progress in speeding up cheque clearance, the behavioural remedies suggested by the Competition Commission are described as inadequate and in need of being looked at again by the director-general of Fair Trading, credit card charges are so complex that MPs had to bring in a professional mathematician to make sense of them, there remains a big problem of financial exclusion, and so on and so forth. Sir John Bond, chairman of HSBC, complained recently that the various government-inspired investigations had cost his bank £100m to deal with and he questioned what good would come of them.

He's got a point. On the hand, banks only need to look at themselves in the mirror to understand why they have become so much investigated and chastised. Profits and return on capital have continued to blossom right through the downturn, removing one of the key defences against the allegation that they are abusing a monopoly position – that profits need to be looked at across the cycle to see if they are excessive or not. The big banks are no different from other monopolists. They overcharge for poor service. There will be many an investigation yet before the bank bashing ceases.

Still smoking at BAT

It is a strange sort of business that feels obliged to spend large sums of money on an advertising campaign that encourages consumers not to buy its products, but that's the Alice in Wonderland world the tobacco industry has inhabited for years. Thus it is that British American Tobacco is helping to finance the "smoking isn't cool" campaign that has been running on MTV, the popular music channel. The company's website, BAT.com, contains advice on how to quit smoking, while BAT's 160-page plus social report is one of the most exhaustive audits of corporate citizenship ever published. Who'd have thought it from one of the world's biggest sellers of the killer weed?

There's no great mystery here. It's called public relations, and it is must be one of the biggest things a tobacco company has to do these days. In order to survive, the industry must engage in a constant process of self flagellation. It's a difficult tightrope to walk. On the one hand BAT is trying to flog as many cigarettes to the world as it can make. On the other it must publicly acknowledge that the product kills and engage in discouraging its use.

BAT is impressively accomplished in performing its high wire act. There's been the occasional wobble, such as when it became known that the Department of Trade and Industry was investigating alleged complicity in smuggled cigarettes, but on the whole BAT seems to be winning the argument that since a 350-year-old habit cannot be abolished overnight, it is better that the trade be carried on by legitimate tax-paying companies such as BAT than driven underground. BAT and other industry leaders have been better at managing governments, health authorities and the public than anyone would have believed possible 10 years ago, when tobacco companies thought their only hope of survival was to diversify away from tobacco as quickly as they decently could.

Tobacco companies will never be thought of as ethical investments, but under Martin Broughton, BAT has started the process of re-establishing respectability, an attribute entirely lost in the great battles over what tobacco companies did and did not know about the dangers their product posed to health. The image is still of an industry facing a tidal wave of litigation, but if Mr Broughton is right, the number of successful cases is in raged retreat. Class actions are still being brought right left and centre, and some of them succeed in the lower courts in winning huge damages. But few of them survive the process of appeal. Increasingly the view is taken that those who smoke are aware of the dangers, both of addiction and to health. The tobacco industry is coming of age.

In the first half of this year, the gentle decline in volume sales BAT forecasts as an ongoing inevitability turned into a sharp 5 per cent fall. The group attributes the size of the fall to the rationing of supply to regions where smuggling is a problem, and expects to make up some of the difference in the second half. None the less, in order to keep bottom line growth on track as sales slowly get quitted away, the company needs to keep buying market share. Hence BAT's interest in Ente Tabacchi Italiani, the Italian state tobacco monopoly that was put up for sale yesterday. Governments unconsciously like to see people smoke. Tobacco raises huge amounts of tax and it reduces the size of the pensionable population. As long as that remains the case, there will always be a place for BAT. No wonder the shares are still riding high, relatively speaking that it. Where else in business do you get that sort of certainty?

A sucker's rally?

A sucker's rally, or the beginning of the end of a two and a half year bear market? The thing that makes it seem more of the former than the latter is that equity valuations in the US remain so much higher than in Europe. Given that it is the accounting scandals of America which have caused the recent loss of confidence in stock markets, that the dollar is on the decline, reversing the capital inflows that have helped sustain US economic supremacy in the past decade, and to boot that the US is about to go to war in Iraq, this is a hard to explain, other than as a lag effect from a bygone age. American stock markets either have a long way still to fall, or European markets have a long way to climb. The outcome will be decided by whether America heads into a second recession, or continues to recover from the last one, as the Bush administration insists it will. We'll see.

jeremy.warner@independent.co.uk