UK bank shares Q2 results preview

The recent set of quite spectacular results in the US quarterly reporting season, largely driven by trading room success, will not directly read across to most of the UK banks.

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However, Barclays (LSE:BARC) has a significant investment banking and trading operation in the US and should therefore see some tangible benefit, while to a lesser extent HSBC Holdings (LSE:HSBA) and Standard Chartered (LSE:STAN) could also ride the wave from its own exposure to that part of the market.

Often viewed as solid and dependable rather than racy, UK banks are currently generating high levels of cash, which is being put to any number of uses. These include acquisitions, investment in technology and generous shareholder returns, each of which will be scrutinised over the next couple of weeks.

Amid the ongoing conflict in the Middle East, concerns have grown for higher inflation and crimped consumer spending, which has left the banking sector under some pressure at various points throughout the year. As such, levels of customer defaults and impairment charges for possible bad debts will be central for sentiment.

In a similar vein, interest rates are now expected to remain higher for longer which, all things being equal, should be positive for the sector. However, it also raises questions around mortgage availability and affordability, such that reported loan demand will be under the spotlight.

Despite a recent rerating of the sector which has left each of the UK banks’ share prices significantly higher over the last year, they remain undemanding in terms of valuation and are trading at a significant discount to their European, let alone US, peers. The currently most preferred banks in the UK sector are Barclays and NatWest Group (LSE:NWG).

Barclays HY – Tuesday 28 July

Barclays remains a preferred play in the sector, with the market consensus of the shares as a strong buy reflecting the group’s financial strength and geographical and business diversity.

Highlights are likely to revolve around the US investment banking operation, which will likely have seen a noticeable benefit from the recent market volatility in the trading arm, as seen in the US. Meanwhile, its huge credit card business will be the subject of focus on both sides of the pond for any deterioration in consumer defaults.

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Standard Chartered HY – Wednesday 29 July

Some years ago, Standard was the darling of the UK banking sector and its recent performance has reignited some of that positive sentiment, with the group’s share price gains topping the table in the sector over the last year.

Its concentration in Asian markets is an attractive prospect both in terms of its move towards the affluent market via its Wealth Solutions unit, fast becoming a jewel in the crown for Standard, with particular promise seeming to emanate from India. In addition, investors will be keen for a positive update from its trading unit, which could provide a springboard for further gains.

Lloyds Banking HY – Thursday 30 July

Often seen as a barometer for the UK economy, Lloyds Banking Group (LSE:LLOY) will likely have continued its strong progress, especially within its large mortgage business despite the headwinds in force for the UK consumer. Customer deposits have also been a positive focus lately, while the provisions for the motor finance redress now seem to be sunk and therefore contained.

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Updates will also be sought in the group’s focus on the mass affluent customer sector, where the recent acquisition of Schroder Personal Wealth was a statement of intent and also on its inexorable progress in digitalising its business which in turn reflects on a lower cost/income ratio. A planned strategic update is also due alongside the results, which should provide clues on where Lloyds plans its next legs of growth.

NatWest HY – Friday 31 July

Now finally free of its government share stake shackles, NatWest is enjoying a new lease of life. Its prodigious cash generation has enabled a generous round of shareholder returns which includes a sector-beating 4.8% dividend yield, 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.

In a similar vein to Lloyds given its largely domestic focus, growth in loans and deposits balances would be well received, while its “intelligent approach to risk” should contain the level of potential customer defaults. NatWest is currently in something of a sweet spot and is along with Barclays a favoured play in the sector.