UK banks have had a tough half-year. Valuations have been slumping and challenges like deposit movement and mortgage pressure were weighing on performance. But we think this could be the turning of the tide – here’s what we’ll be looking for.
This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice. Investments and any income from them will rise and fall in value, so you could get back less than you invest. Ratios also shouldn’t be looked at on their own.
Investing in an individual company isn’t right for everyone because if that company fails, you could lose your whole investment. If you cannot afford this, investing in a single company might not be right for you. You should make sure you understand the companies you’re investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.
Barclays
The biggest question mark over Barclays right now is its announced restructuring. Mainly, what will the size and scale be like?
We expect a focus on cutting cost and not material business changes. Especially in the UK which is already sitting well above peers on a cost-to-income basis.
The real question for investors is if restructuring charges taken over the fourth quarter will hit the expected £890mn buyback – of course nothing’s guaranteed.
Along with traditional lending, Barclays has a giant global investment banking arm. To say it’s been a lag lately might be an understatement, but we’re still expecting another weak quarter here.
With rates forecast to come down over 2024, the outlook for the Initial Public Offering (IPO) and Mergers & Acquisitions markets could give investors something to cling on to. Barclays is also a good barometer for the health of both UK and US consumers with a multinational credit card portfolio. And with this and more traditional lending, default levels will be something to watch closely.
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HSBC
With higher exposure to US and Hong Kong rates, HSBC has been one of the better performers over the last year.
The sale of its Canadian business is also expecting to complete over the first quarter. Management will hopefully shed some more light on where the freed-up capital will be allocated – we’re expecting a mix of shareholder returns, and investment into higher growth areas.
Operationally we think there are some concerns investors would like reassurance on. HSBC’s exposure to the wavering Chinese real estate sector adds risk that more impairment charges will be needed – keep an eye on commentary here. What’s next for costs is also key, with the only real change to 2024 guidance during the third-quarter results being an uptick in expected costs.
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Lloyds
Lloyds faired pretty well in its third quarter results. It was the only major UK bank to see underlying profit before tax improve from the quarter before. As a traditional lender with operations geared toward interest income, net interest margin (NIM) is key.
The 3.08% NIM posted last quarter was lower than markets expected, but management was still confident in delivering more than 3.1% for the year – analysts are looking for 3.01% in the fourth quarter.
With consumers under pressure, news on loan defaults and the value of impairments Lloyds takes will be watched closely. Consensus is for a £126mn impairment charge, but some analysts think it’s possible to unwind previous charges which would be a boost to profit. We don’t think this is likely, but it’s still something to watch.
We’re also keen for any update on what impact management’s expecting from the FCA’s past motor financing investigation – some estimates are suggesting a charge of up to £1.8bn.
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NatWest
Fourth quarter results will cap off what’s been a stormy year for NatWest. A string of public governance issues and disappointing third quarter results in October mean the group’s been trading at a discount to its closest peer, Lloyds.
Capital levels are expected to sit in the middle of the targeted range, so buybacks could be on the cards. Investors will want to keep an eye on the size, scale and commentary on any future distributions.
As another traditional lender, NIM is key. Consensus is for a dip over the fourth quarter to around 2.83%, and the full year figure is expected in line with management’s expectations of “greater than 3%”.
Deposit levels will be important, especially the pace of consumers shifting looking for better rates. Longer-term (and less profitable) savings accounts jumped from 11% of deposits up to 15% back in October and investors will be hoping to see any more increases happen much slower.
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Standard Chartered
Standard Chartered gave markets a bit of a shock back at third-quarter results by taking a massive $700mn write-down on its stake in a Chinese bank.
The Chinese domestic banking environment is tricky and is still an ongoing risk, just like exposure to commercial real estate in the region. Investment in both areas has been trimmed in recent years, but we’ll be watching for impairment levels and any plans to manage risks closely. Consensus is for around $300mn in impairment charges over the fourth quarter.
Current guidance points toward margins growing over 2024, and consensus expects net interest income to rise around 6%. These trends are broadly at odds with the wider sector and rate expectations, so we’re particularly interested to hear how it plans to do this.
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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views might have changed since then. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.
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