Must read weekly preview: FTSE 100 banks, pharmaceuticals, oils

Lloyds Banking Q3 Thursday 29 October & NatWest Q3 Friday 30 October

Even after a blistering run over the last two years which was in part propelled by an overdue re-rating of the sector, banks remain undervalued compared to European peers and there is therefore scope for further growth.

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This is despite the pressure which the sector has encountered this year as exogenous factors have weighed, not least of which has been the potential for the bank surcharge within the imminent Budget. It appears that the surcharge could return to 8% from the current 3% which in turn could reduce earnings by a possible 6%. Additional concerns are that such an increase could decrease global competitiveness given its rates of corporation tax are already among the highest globally. It is also thought that the domestic banks like Lloyds Banking Group (LSE:LLOY) and NatWest Group (LSE:NWG) could be most affected.

Even so, the half-year numbers for Lloyds were strong and dependable rather than shooting out the lights and, given that Lloyds is often seen as a barometer for the UK economy, its progress has been hard-won. In addition, and coming slowly up on the rails, are those units which provide alternative sources of income such as insurance, credit cards and the UK private bank (previously called “Wealth”) and incorporating the recent acquisition of Schroders Personal Wealth (now Lloyds Wealth), where the integration is all but complete.

The likely concentration of growth in these areas over the coming years will lessen the reliance on the more traditional income streams and, in any event, will increase the depth and breadth of revenues in due course.

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Meanwhile, NatWest is enjoying a new lease of life. Its prodigious cash generation has enabled a generous round of shareholder returns, while it apparently remains on the acquisition trail, even if some questioned the £2.7 billion price paid for its recent purchase of Evelyn Partners in the wealth management space. However, this new-found freedom has already enabled a more aggressive acquisition policy, with NatWest having previously made what it described as two significant purchases in the form of Metro Bank’s mortgage book and Sainsbury’s Bank, both of which it would appear have been integrated seamlessly.

In addition, there is little doubt that the acquisition of Evelyn Partners will lift the Private Banking and Wealth Management business to another level. In the meantime, a dividend yield of 5.5% and the prospects for further share buybacks add to a strengthening investment case, and NatWest is currently the preferred play in the sector.

HSBC Q3 Tuesday 27 October & Standard Chartered Q3 Wednesday 28 October

There will be a number of factors in focus, including the read across from the US which suggests that trading and deal making activity will have received another boost. Meanwhile, both loans and deposits overall which increased compared to the corresponding period will be scanned for momentum.

For the financial leviathan which is HSBC Holdings (LSE:HSBA), the group’s push towards the affluent sector received another boost at the interim results, with another promising contribution coming from Wealth. Whereas HSBC had been moving towards becoming a business with a slavish reliance on interest rate movements and levels, the revised and increasing focus on the growth in affluent wealth, especially in Asia, is key to the new offering. The group has been investing heavily in this move, giving HSBC higher, but more diversified income streams. Apart from the longer-term potential for the key Chinese market, the group previously identified areas such as India and Vietnam as being some of the fastest growing economies at present.

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Similarly, and despite the headwinds of its exposure to China and the real estate sector in particular, where its presence has been something of a double-edged sword, Standard Chartered (LSE:STAN)’s general exposure to Asia has offset any immediate concerns. Indeed, Standard previously highlighted that there were particular pockets of optimism throughout the region, such as the movement of capital away from oil in the Middle East and the inexorable economic growth in India. The Wealth business is fast becoming a jewel in the crown for Standard, clearly reaping the rewards of targeting the affluent sector in the relevant regions.

GSK Q3 Wednesday 28 October & AstraZeneca Q3 Friday 30 October

There is little doubt that the drug sector is an exciting space, not only in terms of the leaps being made by technology but also by the major financial rewards which the larger players are chasing. The rapid evolution of AI, for example, is decreasing both discovery and development time to market, while rising demand given ageing populations is another driver. This is despite the industry being one which is notoriously difficult to navigate, since drug development is a time-consuming, costly and risky endeavour, while there is also increasing evidence of litigation for the unintended side-effects of new products. After products have reached peak earnings, revenues are then susceptible to patent expiries, whereby the drugs become generic at much lower prices.

US pricing rules have weighed somewhat on GSK (LSE:GSK), given that the group derives half of its revenues there. During the last year, a 100% tariff on imported medicines was such an example, although the fact that GSK has substantial investment in the US will be a largely mitigating factor. More positively, the group is well diversified, with strong growth being derived from its Speciality Medicines, Respiratory, Immunology & Inflammation, Oncology and HIV products. Immense cash generation has enabled large share buyback programmes, while the 3.6% dividend yield adds to the share price return, where investors have enjoyed a gain of 27% over the last two years.

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AstraZeneca (LSE:AZN) is the third-largest constituent of the FTSE100 with a market cap of £196 billion and has been strategically busy. The company has recently announced a clinical collaboration with Summit Therapeutics of the US worth around £1.5 billion as well as confirming the opening of its newest global strategic research and development centre in Massachusetts in an effort to accelerate its pipeline alongside potential scientific breakthroughs. Share price gains have been harder to come by over the last year, but the group remains an ascending star which is also enjoying heightened awareness within the US after initiating its dual listing there in February.

Shell Q3 Thursday 29 October & BP Q3 Friday 30 October

The generally elevated oil price this year due to the Middle East and ongoing Russia/Ukraine conflicts will lead to high expectations for these quarterly updates. All things being equal, there could be heightened production, margins and profits while also enabling the possibility of significantly reducing net debt. The caveat with the oil price is that extremely high prices can make it much less profitable – or even uneconomical – to continue to drill for more of the commodity, although there are few signs of this at present.

Shell (LSE:SHEL) completed its $14 billion acquisition of Canadian energy firm ARC Resources last month. As a result, the group inevitably predicted higher net debt, but also expects the third-quarter refining margin to jump to $42 per barrel from $24 in the second quarter. The group aims to become the world’s leading integrated gas and LNG business, as well as making Shell simpler, more resilient and more competitive. Structural cost reductions total over $5 billion since 2022, while a diversity of operations regularly allows one area of strength to counter another of weakness. The shares have risen by 42% so far this year.

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BP (LSE:BP.) recently moved a step closer to potentially resuming share buybacks as the oil major flagged a significant reduction in group net debt. The positive impact of elevated energy prices on refining margins underpinned management expectations for group net debt of $13.5-14.5 billion as at 30 September. At the end of the second quarter in late June it was $22.3 billion. The group has been pursuing strategic focuses including strengthening the balance sheet, simplifying the group’s business portfolio and investing with greater discipline, and the shares have risen by 41% so far this year.