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UK Banks results preview

February sees many UK FTSE100 companies report trading updates and this report will focus on the UK banking sector with a preview of what to expect and the latest views from brokers on each bank.


Lloyds Banking Group

Market cap £45.06 BLN As at 20/01/2020

Reporting 20th February 2020


Banks have experienced a volatile time since the election in early December. On the morning of the Tory landslide victory Lloyds shares reached a high of 69.9p only to settle at 64.5p at the close on that Friday. Since then reports of a possible interest rate cut by the Bank of England have stalled optimism that a decent Brexit deal might help the UK banking sector and Lloyds shares currently sit at 58p some 17% from that high on 13th December.


Interest rates are a key factor in any bank’s profitability, it impacts on their net interest margin, this is the difference between what they lend at and what they pay out in interest to savers. If interest rates fall then this reduces the net interest margin which in turn reduces revenue and profits of a bank. According to a report in City am last week there is a 60% probability of a rate cut by the BOE in the next MPC meeting on 30th January. Investors will want to keep an eye on this announcement at 12 noon on 30th January to see how this impacts on the share price of UK banks.


What to watch for in the results!

August last year saw the final date to make a PPI claim from a UK bank. Having already paid out £22 BLN in claims, this was welcome news for Lloyds, however news broke in late December that the bank might have wrongly rejected 61,000 PPI claims. The report said that Lloyds had told customers they could find no records of accounts with PPI attached but have since started paying compensation to some of these accounts. Perhaps watch for more of this in the statement due on 20th February.


As the largest mortgage lender in the UK Lloyds’ share price tends to react more to interest changes than its peers, and with a 60% chance of a drop in rates priced in, expect to see some volatility if rates remain unchanged.


Morgan Stanley are optimistic about Lloyds share price. They currently have an overweight rating on the stock and their price target of 75p was set earlier this month.

Lloyds paid out 3.26p in dividends on 2019 giving a yield of 5.6% on a current share price of 58p.


Other broker ratings are set out below


Barclays Plc

Market cap £31.6 BLN as at 20/01/2020

Reporting on 13th February 2020

As with Lloyds, Barclays saw its share price rise significantly following the general election and hit 192.9p on Monday 16th December. Since then the share price has only fallen 9%, significantly less than both Lloyds and RBS, as Barclays is not so exposed to interest rate changes.


As with Lloyds many brokers still see Barclays shares offering good value at the current price of 175p (20/01/2020). US investment bank Jefferies has a buy rating on the stock with a target price of 244p. They have a view that Barclays shares should produce a return of 9.5% helped by a progressive dividend pay-out and share buy backs of £2.5 BLN in both 2020 and 2021. This offers a 39% upside on today’s share price.


Barclays have been working on cutting costs and reducing its exposure to investment banking operations and announced as recently as last week that it was embarking on a plan to cut about 100 senior jobs, mostly in trading roles across its corporate and investment bank.


What to watch for in the results!

Barclays has already warned that 2020, with Brexit still to be done, is going to a difficult year. The bank is targeting a nine per cent return on tangible equity (Rote) this year and 10 per cent Rote next year, but warned in their most recent set of results that meeting those goals could be tricky.


“Given global macroeconomic uncertainty and the current low interest rate environment, it has become more challenging to achieve these targets, particularly with respect to 2020,”

The bank said.

“We just want to be realistic about our targets for next year. For now we are holding to the 10 per cent target…but it is a different market than we faced a couple of years ago,” Staley added.

We have all read about an economic lift following the general election so maybe there could be a surprise in the numbers here. Certainly there are a number of brokers with positive opinions on the share price.


Other broker ratings are set out below



RBS

Market cap £30.45 BLN as at 20/01/2020

Reporting on 14th February 2020

Once the world’s largest bank by assets, RBS is still part owned (63%) by the UK government and has a plan to buy back £15 billion worth of shares by 2023.


As with Lloyds, RBS shares have fallen over 15% since the general election and 8% since speculation that the BOE will cut rates at the end of this month.


In their last set of number the bank reported a loss in the quarter reversing a trend of quarterly profits, again this was caused by a huge £900 MLN PPI claims bill as the deadline for claims ended in August last year.


What to watch for in the results!

The bank is now under the management of Alison Rose, the first woman to run one of the big four banks in the UK and hopes that the bank should return to profits again in their next announcement. Ms Rose has been under pressure to reduce the size of its investment bank, NatWest markets having lost £193 million in the last set of numbers, and investors should keep an eye any progress made in the last few months.


Analysts at investment bank Goldman Sachs re-iterated their buy rating on the shares with a price target of 315p offering a 40% uplift from today’s price of 223p.


Other analyst ratings are below


HSBC

Market cap £115 BLN as at 20/01/2020

Reporting on 18th February 2020

HSBC is one of the largest banks in the world and struggled last year to increase profits as it announced a plan to cut costs and overhaul its investment banking unit this year. In October the bank unveiled a plan to cut over 10,000 jobs with an expectation of further job cuts in its annual results due next month.


HSBC has performed well in its Asian business but US and European operations saw profits tumble 25% in the quarter ending September 2019.


The bank has consistently paid a good dividend and pays shareholders four dividends a year. In 2019 shareholders received nearly 40p in dividends which is a yield of over 6.5% based on today’s share price of 592p.


What to watch for in the results!

Permanent appointment of interim CEO Noel Quinn. Further job losses and cost cutting. Whilst last quarter’s results were received badly, and saw the share price fall 7% for the year, it might be worth looking at how the US investment banks have performed in their results announced last week to get some idea of what to expect from the world’s “Local Bank”. Most US banks beat consensus!


Broker ratings for HSBC are less favourable than the UK based banks



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