With just two weeks to go until the big UK banks publish full-year results, our City writer reveals what analysts think and whether a set of results already out is a canary in the coal mine.
Expectations for the large-cap banking results season continue to build after Virgin Money (LSE:VMUK) today delivered a reassuring update on mainstream industry trends.
Key points from results for the three months to 31 December showed progress for Virgin’s net interest margin and an arrears level broadly stable across key lending segments.
Their recent progress reflects the ongoing support of higher interest rates and optimism that an expected UK recession is likely to be less severe than had been thought in the autumn.
Barclays is due to kick off the results season on Wednesday 15 February before Standard Chartered (LSE:STAN) the following day and NatWest on Friday 17 February. The following week sees figures from HSBC Holdings (LSE:HSBA) before results by Lloyds Banking Group on 22 February.
While the sector’s 2023 share price rally has increased the risks going into results season, analysts at UBS said recently that banks remain attractive at 6.1 times 2024 forecast earnings versus European peers on 6.8 times and the UK market on 10.1 times.
It said this discount was driven by market and political upheaval in 2022 and a lack of decent dividends post the financial crisis.
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UBS believes the market remains too cautious on the level of net interest income to be achieved in the current rate cycle, and is assigning too harsh a valuation to a top line that it thinks will prove more defensive to peak rates than is priced in.
And in a note published yesterday, Bank of America told investors it regards NatWest as particularly undervalued, and that Lloyds is also attractively priced.
It said: “Mortgage spreads are set to recover from early 2023 and we see margin expansion as more significant for revenue growth than weak volumes.
“UK banks are well positioned for, what looks like, a less severe recession, and we see falling mortgage rates and net credit card repayments as supportive of credit quality.”
Virgin Money increased its credit provisions to £485 million from £457 million the previous quarter, partly reflecting expectations that arrears will normalise from low levels.
Chief executive David Duffy said: “Arrears remain broadly stable but we’ve increased the support available to those who need it and remain prudently provisioned for an uncertain economic outlook.”
He said the bank’s overall first-quarter performance had been a positive one, reflecting further progress on digitisation and growth in lending across the business.
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Mortgage balances lifted 0.4% to £58.4 billion despite a slowing housing market and business lending was up 2.4% to £8.4 billion. Unsecured lending increased 0.9% to £6.2 billion, a more moderate pace of growth that reflected a disciplined approach to credit card business.
The net interest margin improved to 1.89% from 1.86% the previous quarter, driven by higher rates and as deposit margins offset ongoing pressure on mortgage spreads. The group continues to expect a margin in the 1.85%-1.9% range for the 2023 financial year.
Shares have risen by a third in the past six months but fell back 3p to 189.9p following today’s update. UBS has a price target of 205p, while analysts at Peel Hunt are at 268p and said a current valuation of 0.5 times tangible net asset value offered significant upside.
They added: “Management continues to target returns which are not reflected in the share price despite decent lending momentum in Q1 and self-help characteristics such as buy-backs and the cost reduction programme.”
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