Bank sector Q3 results: Prospects for Lloyds Bank and Co

by Richard Hunter from interactive investor |

With RBS kicking off bank sector reporting season next week, our head of markets assesses the outlook.

Caveat emptor.

There have been some striking share price hikes of late, due in part to some recent optimism on the outcome of Brexit negotiations. Lloyds Banking Group (LSE:LLOY), for example, seen as a bellwether for the UK economy, has risen 20% in the last week alone. Indeed, by the time the ink dries on this article, things could look rather different should talks falter (again).

That being said, a number of the key metrics over recent reporting quarters have been impressive, giving some comfort that if nothing else, the banks are perceived to be in a much stronger and more stable state than during the financial crisis of a decade ago.

Of course, these metrics will receive scrutiny. These range from the strength of the capital cushions, the Returns on Capital, the Net Interest Margins (still under severe pressure from historically low interest rates), the level of impairments (a significant rise could herald the onset of an economic slowdown) and the cost/income ratios.
Each of the banks has a different story to tell, and the third-quarter updates will be scrutinised with interest.

At Royal Bank of Scotland (LSE:RBS), for example, at the half-year numbers, the bank had generated cash in abundance for the period. This was helped along by the sale of its Saudi bank stake, enabling a generous special dividend which turbocharged the prospective yield to well in excess of 6% from its current 2.4%. In addition, payment of a special dividend does not compel RBS to repeat the payout should economic conditions tighten. In the here and now, RBS is enjoying the fruits of a decade of financial pain and re-engineering and the market consensus has improved accordingly.

For Barclays (LSE:BARC), the cosmetic boost given to the numbers by a lack of repeating litigation and conduct charges from the comparable period were a helpful fillip. Given Barclays' recent track record, however, it is too early to call whether these generally lower charges will become the norm. The digital part of the bank has already gained traction and is becoming entrenched within the UK business, which should ultimately relieve some cost pressures.

Barclays seems to be making progress on a complicated transition, while managing its complex business and the general market view is positive.

The investment in digital banking, in which Lloyds Banking is predominant, continued apace at the half-year, while the tie-up with Schroders (LSE:SDR) should deliver benefits in what is the increasingly important space of financial planning. The group's efficiency drive is delivering results, with a cost/income ratio which stood at under 46% (compared to nearly 48% previously), representing a sector-beating and extremely healthy number. Again, market consensus is a 'buy', but of course prospects for the UK economy in the current environment could continue to be a drag on the share price, even though the bank has outperformed the wider FTSE 100 index over the last year.

The possibility that the Chinese economy is coming off the boil, coupled with the political protests in Hong Kong have weighed on Standard Chartered (LSE:STAN) and HSBC Holdings (LSE:HSBA) of late.

For the former, which has the China/Asia region to thank for over 60% of last year's underlying profit, the concerns are tangible. Standard Chartered, which had previously (and quite successfully) been concentrating on cost reduction, has now set its sights on some ambitious targets, such as annual income growth of between 5% and 7% for the next three years to 2021. There is also a market suggestion that's there will be another $1 billion buyback programme next year, which would mirror this year's buyback as announced in April and completed in September 2019. In addition, management has suggested that it is capable of double dividend payments by 2021.

Given the economic and political backdrop in the region, the general market view is neutral towards a former market darling.

It is fairly unusual to see a market consensus sell on the banks, but HSBC currently finds itself in that position. Again, it is heavily exposed to the Asian region (an estimated 80% of profits), while US interest rate cuts have been unhelpful to its business there and, of course, Brexit in its UK market is also weighing. In addition, the fact that the previous chief executive is departing after just 18 months in the job has raised concerns that his replacement may grasp the cost-cutting nettle which seems to be taking centre stage at the bank, and could even reconsider the generous dividend policy.

  Results due Share price 3 months Share price 1 year Dividend yield (%) Market consensus
RBS 24th October -0.40% -5% 2.4 Cautious buy
Barclays 25th October 5.10% 1% 4.3 Buy
HSBC 28th October -9% -3.30% 6.6 Sell
Standard Chartered 30th October -8% 16.50% 2.7 Hold
Lloyds Banking 31st October 6.30% 6.40% 5.3 Buy
FTSE 100   -5% 1.70% 4.6 N/A

Source: interactive investor

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