TAKING THE PULSE: U.K. banks' first-half results will reflect a mix of good news from investment banking activity and bad news in the form of further deterioration in mortgage and corporate loans from a distressed economy. Exceptional items and other accounting nuances mean headline profit or loss numbers will require a closer look.

Some analysts have been loath to predict what the bottom line will be when the banks start reporting Aug. 3, because gains from asset sales, debt buybacks and mark-ups on securities could tip the balance between a profit and a loss.

Exactly two years after the credit crisis changed the world of banking forever, shareholders should get some cheer from trading gains in investment banking divisions and rising margins in retail lending.

The Bank of England's injection of GBP116 billion through bond buying, and other BoE programs, have helped stabilize market conditions since March. Some assets that helped trigger the crisis in August 2007 could even be marked up by banks holding them in their trading book, as investors looking for bargains have crept back into some areas of structured credit markets.

But optimists hungry for signs of a U.K. economic recovery will have little to chew on. Lending volumes remain a fraction of what they were in the boom times, and bad mortgage and corporate loans continue to pile up.

Most of the U.K.'s biggest banks aren't in the clear yet either when it comes to capital hikes, some analysts say. Though the U.K. Financial Services Authority has given the banks a clean bill of health for now, government proposals are calling for more-stringent rules on capital cushions. Broader regulatory reform in Europe and internationally could result in investment banking units having to hold more capital to support their activities, among other reforms.

Such concerns may be overlooked, though, when investors digest what on surface may look like a return to growth by banks in the first half.

"Strong first-half results are a foregone conclusion, driven by one-offs such as debt swap gains, gains on disposals, and by very strong credit and equity markets. The big question is the outlook for bad debt," said Sandy Chen, analyst at Panmure Gordon, who anticipates loan impairments will climb above expected levels in the second half of 2009 and throughout 2010.

Loan impairments will certainly get their share of the headlines, with Lloyds Group PLC (LYG) and Royal Bank of Scotland Group PLC (RBS) - the two banks that came closest to collapse from the crisis and had to be bailed out by the government - seen reporting some of the worst levels of bad debt.

ANALYSTS' PICK

Barclays PLC (BCS) could well emerge with the strongest numbers, analysts predict, almost exclusively because of the stellar performance of its Barclays Capital division. Like U.S. banks that have recently reported impressive second-quarter earnings, Barclays Capitals' trading operations - including the former Lehman Brothers U.S. business it bought when that bank collapsed last year - will have benefited from high levels of activity. Whether it can sustain that growth, however, is up for dispute.

COMPANIES TO WATCH:

HSBC (Monday, Aug. 3)

MAIN FOCUS: HSBC Holdings PLC (HBC) should get a boost from its investment banking unit and is expected to turn an underlying pretax profit. In its first-quarter update, HSBC said operating performance was "encouraging" and that loan impairments in its troubled U.S. consumer lending business were lower than in the fourth quarter of 2008. More pain is seen from the U.S. unit, while depressed net interest margins on customer deposits and one-off items will add to the drag on earnings. Profit numbers will also be hit by the accounting treatment of HSBC's $17 billion rights issue in March. Keefe, Bruyette & Woods forecasts a $16.11 billion impairment charge and a $1.45 billion pretax profit for the six months.

Barclays (Monday, Aug. 3)

MAIN FOCUS: Barclays is probably in the best position to wow investors after two strong quarters at Barclays Capital and a net gain of GBP5.3 billion from its June sale of Barclays Global Investors. The bank indicated in June that second-quarter impairment charges would be broadly the same as the first quarter's GBP2.3 million. Macquarie expects a GBP3.79 billion pretax profit, after GBP4.5 billion impairment charges. The sustainability of revenue growth is the main concern for many analysts. Debt analysts at RBC fear Barclays will take on too much risk and "stray from the path of capital righteousness," while JPMorgan prefers the bank to the others, but frets it may need to come up with GBP12.8 billion in additional capital by the end of next year to meet potential regulatory changes.

Standard Chartered (Tuesday, Aug. 4)

MAIN FOCUS: Standard Chartered PLC (STAN.LN) has deflected many of the problems faced by its U.K.-based peers by making most of its money in emerging economies and having relatively little exposure to the U.K. and U.S. In May, it said the first five months of the year produced record levels of income and profit, particularly in wholesale banking. First-half pretax profit is seen around $4 billion, and analysts will be looking for news of any acquisitions in markets being exited by other banks.

Lloyds (Wednesday, Aug. 5)

MAIN FOCUS: Lloyds warned in May that full-year corporate loan impairments should be around 50% higher than in 2008 - putting them at roughly GBP14 billion. The biggest blight on its loan book has been U.K. and Irish commercial property that plummeted in value and put developers out of business. The bank is taking out insurance from the U.K. government - its 43.5% owner - to protect itself from losses on a GBP250 billion loan portfolio, but it has to cover the first GBP25 billion in defaults. Accounting tweaks could also feature here, with speculation that Lloyds could mark up the value of certain securities that were considered almost worthless at the height of the crisis last year but have since seen modest gains.

Royal Bank of Scotland (Friday, Aug. 7)

MAIN FOCUS: Royal Bank of Scotland Group PLC (RBS) is also seen benefiting from gains in its investment banking activities, but its focus on fixed income means it probably won't have done as well in the second quarter as those with big equity trading franchises. Morgan Stanley sees a GBP1.5 billion pretax profit, after GBP5.43 billion in provisions for bad and doubtful debts. The bank has said it will take three to five years to rebuild shareholder value, which may sound like a long time to U.K. households, since they are the 70% owner of the bank via a government stake.

-By Margot Patrick, Dow Jones Newswires; +44 (0)20 7842 9451; margot.patrick@dowjones.com