WITH British consumers grappling with a mammoth £1,100 billion in debt, is it time to sell the shares of British banks? Goldman Sachs certainly thinks so. Last week, the investment bank’s analysts claimed the position on bad debts is going to get uglier.

Goldman argues that bankruptcies will soar by 40% over the next two years, while individual voluntary arrangements, where people pay off a percentage of their debts over five years, will go through the roof after rising 120% in the third quarter.

With some clever number crunching, Goldman calculates that a whopping £36 billion in bank lending could be at risk.

That looks a bit extreme, but it does underline the huge risks facing the banks. Goldman slapped sell ratings on HBOS, Alliance & Leicester, Lloyds TSB and Bradford & Bingley, but urged investors to buy Royal Bank of Scotland.

The alarm bells over debt have certainly been ringing. A few months ago, some of the most senior bankers lined up to take potshots at consumers for their increasingly “cavalier” attitude to paying off debts.

The banks have been badly stung. The top five — HSBC, RBS, Barclays, HBOS and Lloyds TSB — wrote off about £2.3 billion in bad debts in their UK retail banking businesses in the first six months of this year.

It takes a bold banker to call the turn in the credit cycle. Most believe that there is more pain to come. However, more bullish analysts argue that while the banks may have been careless in their past lending they have been far more careful in their provisions.

What does this mean for shareholders? It’s not all gloom — British banking shares have outperformed the stock market by 3% in the past six months. Bad debts will be ugly, but with fresh indications last week that people are cutting credit-card debts, the pain should ease.

The clearing banks HSBC, Barclays, RBS and Lloyds are probably most vulnerable because they have more unsecured lending than their mortgage-bank rivals.

Meanwhile, most of the banks are expected to post solid trading statements in the next few weeks. That should continue to support bank shares for now, but expect any slip-ups on bad debts to be severely punished by investors.

Pleased Punch

GILES THORLEY, chief executive of Punch Taverns, was typically upbeat last week. He should be — after a 51% rise in the shares in the past 12 months and a punchy 48% jump in full-year profits.

Almost a year ago, Punch unnerved some in the City by splashing out £2.7 billion to buy Spirit Group and enter the world of managed pubs. Up to that point Punch had owned only pubs that were leased to tenants. The fear was that Punch was paying big money for a business it did not understand. Punch has shown again that it is a shrewd operator — Spirit has been well integrated, 400 less attractive pubs have been sold off for £700m and the core managed pub business is growing sales at a decent 6%.

The shares are trading at 13 times forecast earnings for 2007 and still look good value.

grant.ringshaw@sunday-times.co.uk