UK bank sector: What to expect this results season

by Richard Hunter from interactive investor |

Ahead of UK bank sector results season, interactive investor's head of markets tells us what to look for.

Royal Bank of Scotland (LSE:RBS) kicks off the full-year reporting season for the major UK banks on Friday, 15 February.

The share price performance of the UK banks has been mixed over the last quarter, but over the last year the moves are the same –  a downward trajectory.

Any number of factors have conspired to depress share prices, ranging from the pace of interest rate rises - traditionally a positive - which has failed to materialise at the pace previously envisaged, to the inevitable mention of Brexit.

The latter is not just an issue in terms of economic uncertainty, where Lloyds Banking Group (LSE:LLOY), for example, bears the additional burden of being seen as a proxy for the UK economy, but also whether this has filtered through to lower lending figures for the banks as businesses keep their powder dry ahead of the outcome, whatever that may be. 

Indeed, yesterday's Bank of England update noted that there had been a sharp fall in business investment at the end of 2018.

  Share price 3 months Share price 1 year Dividend yield (%) Market consensus
RBS (15 Feb) -5% -14.5% 0.8 Strong buy
HSBC (19 Feb) -0.4% -13.2% 4.9 Hold
Lloyds Banking (20 Feb) -4.1% -15% 5.5 Buy
Barclays (21 Feb) -12.6% -19% 2.9 Strong buy
Standard Chartered (26 Feb) 8% -22% 2.4 Hold
FTSE100 -0.7% -1% 4.5 N/A

Source: interactive investor figures as at 8.2.19

In addition, the cost of the regulatory burden remains huge for the banks and was exacerbated over the course of the year by some unwelcome and surprising extra provisions made by some, whether in US residential mortgage backed securities, or indeed Payment Protection Insurance (PPI) in the UK.

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 in the midst of the financial crisis of a decade ago.

Of course, the metrics will receive scrutiny. These range from the strength of the capital cushions, the Returns on Capital, the Net Interest Margins, the level of impairments and the cost/income ratios.

Also, where applicable, those banks with trading arms will be reporting on how successful or otherwise the final quarter of 2018 was, given a difficult market backdrop – although if the recent US banking season can be taken as a lead, they may have fared well.

There will also be stock specific issues to contend with, such as the perceived slowdown in the Chinese economy of late (HSBC and Standard Chartered in particular), shareholder concern over the strength of the bank’s turnaround (Standard again, and even Barclays where calls from a shareholder activist could grow louder) and, in the case of RBS, the latest situation on the removal of the government stake.

Leading into the season, the market consensus of the shares ranges between neutral and positive.

Rather similar to the FTSE 100 index overall, the current view is that there are reasons to contend that shares are quite simply undervalued and that a positive fillip to share prices is overdue.

However, the unnerving twists and turns of the Brexit debacle may well continue to keep potential investors on the sidelines until the issue can be resolved one way or the other.

As such, it may well be that the banks will have to swim harder than ever to overcome the current tide of apathy towards the sector.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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