Will 2024 be a better year for UK banks?
As the banking results season nears, investors will hope the figures draw a line under what’s been another tough year. At least one City firm sees cause for optimism.
13th February 2024 13:35
by Graeme Evans from interactive investor
Huge annual profits are set to increase scrutiny on why Britain’s big lenders including Barclays (LSE:BARC) and Lloyds Banking Group (LSE:LLOY) continue to languish in valuation terms.
The shares of the UK’s domestic players trade at levels between 4.2 times and six times next year’s forecast earnings, compared with eurozone banks on about 6.2 times, the FTSE 100 index at 10.1 times and the Euro Stoxx 600 at 12.2 times.
UBS believes reasons for the UK underperformance include disappointing past dividend payouts and the challenging regulatory and consumer protection backdrop, as well as modest expected profit growth at a time when almost all European banks look attractively valued.
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The investment bank said: “Since 2008, the seven UK banks we track have paid £65 billion in customer refunds, 20% of current net asset value. Below the line restructuring charges absorbed another £50 billion, and litigation and regulatory settlements £28 billion.”
The UK’s domestic banks disappointed on dividends following the financial crisis due to capital requirements that ended up being much higher than early expectations, as well as restructuring and customer refund burdens such as PPI that were significantly above forecast.
Now the industry is facing a review of past motor finance commission arrangements, which the Financial Conduct Authority (FCA) has said will cover contracts from 2007.
Lloyd Banking Group is seen in the City as being potentially the most exposed, one reason why its shares have fallen around 10% at a cost of £3 billion since the FCA announcement.
Given the uncertainty, UBS has removed Lloyds from its European top picks portfolio until it gets more information with which to narrow the range of plausible outcomes.
The bank has a price target of 50p prior to annual results on 22 February, noting that on an underlying basis the valuation misses 2025’s likely expansion in net interest margin.
Lloyds is poised to contribute about £8 billion to an overall profits haul of more than £45 billion as the UK’s four biggest lenders reveal the bottom-line impact of much higher interest rates.
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However, the past year was still a poor one for shares in the UK domestic lenders as late-cycle compression in their net interest margin drove material misses to forecast earnings.
NatWest Group (LSE:NWG), for example, disappointed investors when it lowered its guidance for its full-year margin to nearer 3% compared with 3.15% in the summer.
However, UBS believes lenders are past their “peak pain” on mortgage spreads, fuelling its hopes of a better year for valuations.
It said: “After a disappointing 2023 in which declining NIM drove significant EPS downgrades, we think this could be the year for the UK domestics as margins decline elsewhere and the UK economy, mortgage and housing markets and bank revenues return to growth.”
Barclays is the City firm’s top UK domestic pick, with a price target of 200p. It also highlights the potential for a narrative change when boss C.S. Venkatakrishnan hosts the bank’s first investor event in a decade alongside results on 20 February.
The speculation ahead of NatWest results on Friday has focused on this year’s sale of the taxpayer’s remaining stake - potentially at a material price discount - to retail investors.
The appointment of stand-in chief executive Paul Thwaite or another person as permanent successor to Alison Rose may be delayed, however, as chair Rick Haythornthwaite is not due in post until 15 April.
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For the international players HSBC Holdings (LSE:HSBA) and Standard Chartered (LSE:STAN), the key questions will be on revenue sustainability as Federal Reserve interest rates begin to fall and whether these firms can produce premium growth, particularly in Asia.
UBS said: “HSBC offers higher capital returns near term, boosted by the Canada sale, and lower rate gearing. Much cheaper Standard Chartered is more geared to rates and capital markets but has idiosyncratic tailwinds that imply good growth in 2024.”
Ahead of the results season, the bank’s analysts have forecast:
Barclays, (UBS: Buy recommendation, 200p target)
Q4 profits: £957 million excluding litigation and conduct charges, down 32% on a year earlier and down 49% on the previous quarter.
Full-year profit: £7.5 billion, down 13%
Final dividend: 5.5p, up from 5p the year before.
Total for the year: 8.2p, up 13%.
Buyback for the year: £1.75 billion.
Lloyds, (UBS: Buy recommendation, 50p target)
Q4 underlying profits of £2.05 billion, up 20% year-on-year and 1% quarter-on-quarter.
Full-year profit: £8.1 billion, up 15%
Final dividend: 1.8p, up from 1.6p the year before.
Total for the year: 2.8p, up 15%.
Buyback for the year: £1.75 billion.
Friday: NatWest (UBS: Buy recommendation, 250p target)
Q4 underlying profit: £998 million excluding litigation and conduct charges, down 35% on the year before and 32% on quarter.
Full-year profits: £5.8 billion, up 7%.
Final dividend: 9.6p, down from 10p.
Total for the year: 15.1p, down 50%.
Buyback for the year: £1.75 billion.
HSBC (UBS: Neutral recommendation, target 620p)
Q4 adjusted profit: $7.5 billion (£5.9bn), up 14% but down 7% on the previous quarter.
Full-year profit: $33.8 billion (£26.7bn), up 44%.
Q4 dividend: 34 US cents, up from 23 US cents the year before.
Total for the year: 64 US cents, up 99%.
Buyback for the year: $9 billion.
Standard Chartered (UBS: Buy recommendation, target 810p)
Q4 adjusted profit: $816 million (£644.2m), up 26% but down 38% on previous quarter.
Full-year profit: $5.4 billion (£4.3bn), up 17%.
Final dividend: 17.4p, up 24%.
Total for the year: 23.4p, up 30%.
Buyback for the year: $1.75 billion.
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