Big UK bank earnings eyed for growth signs

Around ten years after the financial crisis, investors will be alert to any signs of deepening recovery at Britain’s four dominant banks, as they report third quarter results over the next week.

Lloyds Banking Group Q3 Interim Statement – 25^th October

Key forecast: Q3 Total income: £4.46bn, up 4.4%

Lloyds Bank remains distinct for its rude health amid increasing exposure to UK consumers and businesses. Return on common Equity, a keenly eyed measure of underlying profitability was a satisfactory 12.1% at Britain’s largest mortgage lender by the end of its last full year. The figure is widely forecast to tick down to 11.3% in Lloyds’ current financial year. But it will still surpass the paltry ROE average of HSBC, Barclays, Standard Chartered and RBS. Thomson Reuters’ consensus forecasts indicate their combined mean will scrape in below 5%. Bear in mind that cost of equity was higher at these than the 6.2% Lloyds achieved in 2016, yet most of their shares have drifted higher. This suggests improving investor confidence. Progress has bordered on glacial though, including at Lloyds. Decreased risk-taking has pressured its non-interest income. Elsewhere, fees and commissions are down 50% over 5 years. Luckily, costs have also slumped. But to grow further Lloyds has already ramped credit card lending by 80% this year with its MBNA purchase. And it already accounts for a fifth of all UK mortgages. This is why investors will particularly listen out for plans to increase fee–earning wealth management, where margins are typically higher than other bank businesses.

Barclays Q3 Earnings 26^th October

Key forecasts:

The worst performing stock, Barclays, down almost 13% this year reflects a mixture of questions over the conduct of its CEO, other lingering legal issues and scepticism about the effectiveness of the group’s geographical and divisional strategy. The group has largely hit stated targets. But Barclays, trading at just 67% of its book value, and the biggest faller in Europe’s STOXX 600 banks gauge, has work to do to convince investors of its ability to grow as a ring-fenced lender. Its market discount now effectively values Barclays’ profitable credit card business, UK high street bank, and HQ at nothing - all for the sake of an underperforming U.S. and international corporate and investment bank. Almost regardless of Barclays’ Q3 results, its shares will continue to ail unless the group takes radical action. The likelihood that Thursday’s commentary will contain such news is admittedly a long shot.

Royal Bank of Scotland Q3 Interim Statement - 27^th October

Key forecast: total income £3.1bn, down 6.2%

The main anomaly amongst shares in Britain’s large cap lenders this year has been the rise and rise of RBS. It is up 25% so far. There’s little mystery here though. The group was amongst the worst shares on the FTSE 100 in 2016, and its 2017 story is largely one of omitted mishaps committed in the year before. RBS is still unlikely to make a profit this year. Nor is there much sign of sustainable abatement of its own legacy conduct matters. The group said on Monday that its most high-profile remaining legal case, surrounding the defunct Global Restructuring Group, will cost it £400m in compensation. That is of course, before the outcome of a spate of litigation is known. Settlement costs may rise. RBS did register in August its first half year profit since 2014, albeit a remaining £3bn in provisions for a U.S. mortgage-related settlement will almost certainly be eclipsed by the penalty. Confirmation is expected late this year. From 2018, the path to higher earnings for shareholders instead of regulators is likely to be clearer. That said, the cost of remediation after failing to dispose of Williams & Glynn as demanded by Brussels, and tougher BoE stress tests will continue to stand between investors and a resumed dividend for at least another year.

HSBC Holdings Q3 Earnings – 30^th October

Key forecasts:

For a glimpse of the bank Barclays would like to become, we need look no further than HSBC. Shares in the Asia-Pacific-facing group have risen 13% this year and have outperformed the banking sector by almost 50% in two years. That’s not down to faster and deeper profit growth than Barclays. HSBC’s forecast return on equity of 8.1% is approaching the rule-of-thumb 10% mark generally regarded as defining the minimum threshold of profitability. But the cost of that equity was already 9.2% last year. So HSBC’s greatest success has in fact been a more sure-footed programme of restructuring, exits and disposals. These have left the group flush with cash and nothing substantial to splurge on, even as operating income has drifted lower. Also note that whilst HSBC has downsized, like its smaller rival, it has not entirely exited riskier activities like investment banking and markets. HSBC’s key capital buffer was 14.7% at the end of June, well above its end-of-year target. It is even beginning to look priced for perfection, a dangerous look for global bank. With at least two further multibillion dollar potential disposals left on the books however, HSBC can probably delay reckonings for now. Share buybacks and other forms of largesse are expected to continue.