7th February 2014
Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers takes a look at what to expect over the coming reporting season…
The banks are not currently an easy place to be invested, as has been the case since the financial crisis. Royal Bank of Scotland and Lloyds Banking Group recently joined the likes of Royal Dutch Shell and BG Group in announcing disappointing news ahead of their full year numbers, presumably in the hope of taking the sting out of the market reaction on the actual day of the results.
Whilst many of the long-term themes remain for investors to look out for, some new ones have slowly been emerging over the last few months.
Before we cover these, below is a summary of the recent price movement, yields and market consensus of the ‘big five’ UK banks.
|Full year results due||Share price performance 3 months||Share price performance 6 months||Share price performance 1 year||Dividend yield||Market consensus|
|Lloyds||13 February||+10%||+8%||+57%||0%||Strong hold|
|StandardChartered||5 March||-16%||-23%||-26%||4.3%||Strong hold|
Source: Hargreaves Lansdown website and Digital Look as at 5 February 2014.
The key question for investors is which of the banks will actually report a profit and which will remain in the red? Underneath this, how will the banks’ main efficiency figures have fared, such as the cost/income ratio and the ROCE (return on capital employed)? How will the inevitable cost cutting be received, particularly in relation to job cuts – a political hot potato at the best of times and even more pertinent for part-government owned Lloyds and RBS?
In the face of increasing regulatory prudence, there will be close attention on the banks’ capital cushions (Barclays for example, underwent a rights issue in September 2013 to shore up its balance sheet) whilst other regulatory provisions (PPI for RBS and Lloyds, US Mortgage for RBS and interest rate swaps generally) may also weigh.
Indeed, provisions in general will be under the spotlight. Over recent quarters, the general level of impairments (bad debts) has improved, and investors will show little patience if this trend has noticeably reversed.
As seen in the US (usually an accurate lead indicator) there may be some disappointments within the investment banking and trading operations of the banks, given general market volatility and economic instability. This is quite apart from the fact that most of the UK banks are subject to some currency volatility, which could be another cause for concern.
On a wider basis, there will hopefully be some updates with regard to ongoing investigations, such as FX and Libor – unfortunately these will continue to hamper share price performances until this uncertainty can be removed.
It may be too early for the banks to react to the increasing levels of competition. Sainsburys has just purchased the remaining half of its bank it did not own from Lloyds, whilst Tesco and Marks & Spencer continue to grow their operations and Banco Santander has its high profile advertising campaign. However, this is clearly an emerging theme and the banks may need to remind investors of their individual strengths.
Over the last few weeks, the emerging markets have taken high priority in investors’ minds, and the banks with emerging market exposure (HSBC and, in particular, Standard Chartered) will need to declare the effect this has had, and is having, on their performance.
In addition, and in the background, the possibility of Scottish independence is becoming a full debate, which could have particular significance to, most notably, RBS, as well as Lloyds in view of its previous acquisition of HBOS.
Rather more positively, a burgeoning UK property market allied with government “Help to Buy” schemes may have resulted in some positive news on mortgage sales, the likes of which have not been seen for a few years.
In Standard Chartered’s update in early December the company warned that difficult market conditions were likely to remain through to the year end. This resulted in an additional dip in its share price and news of a possible takeover speculation attached to the stock, which was later dismissed.
There is a great deal of information to be provided and assimilated over the coming weeks both in terms of the performances of the banks themselves and whether the updates provide any clues to the economic health or otherwise in the countries in which they operate.