2017 bank results preview

Laith Khalaf, senior analyst at Hargreaves Lansdown, takes a look at what we should expect from the big four banks as results season begins.

2017 bank results preview

Bank results are upon us once again, kicking off today with Lloyds. Below is a quick rundown of how things stand and what we can expect from each of the big four, along with results dates and some recent share price performance.

Bank results calendar

7am Thursday 27th July Lloyds
7am Friday 28th July Barclays
5am Monday 31st July HSBC
7am Friday 4th August RBS

 

HSBC has been the clear winner over the past year in terms of share price appreciation, thanks to all those overseas earnings and a collapse in sterling. RBS is now trading where it did before the Brexit vote, though it’s been anything but a smooth ride – the shares price dropped 40% in the wake of the Referendum result.

Lloyds

This will be Lloyds’ first set of results since it became a fully private company, after the government sold its last shares in the bank in May. That won’t have any immediate effect on today’s results, though it does remove a major downward pressure on the share price. Indeed given recent government share sales, coupled with the doubt cast over the UK economy by Brexit, it’s something of an accomplishment that Lloyds stock is only a couple of pence shy of the price it stood at on Referendum day last June.

Lloyds is of course a bellwether for the UK economy, seeing as it is so plugged into loans to UK consumers and businesses. This is particularly relevant at the moment given the Bank of England’s concern over the consumer credit bubble, and any sign of rising loan impairments could hint at problems brewing in the UK economy at large. So far though, loan impairments have remained remarkably low, despite a slowing economy, weak wage growth and rising inflation. Given the extremely low interest rate environment, we don’t expect a step change in this number this morning, outside any effect from the acquisition of the MBNA credit business.

A rise in the interim dividend, payable in Autumn, could also be the cards. The lion’s share of annual ordinary dividends, together with any specials, come at the full year stage and will be paid next spring. However a rise in the interim dividend would be a show of confidence, and a hint that good things are still to come for income-seeking shareholders, of which there are many. Consensus estimates are for a 0.95p interim dividend to be announced today, which would be a 12% increase on the 0.85p paid last year.

It’s worth bearing in mind that the comparable period for the first half of 2016 includes a £790m provision for the redemption of Enhanced Capital Notes (don’t ask). Consequently, if you’re interested in the performance as Lloyds as a business, rather than as an accounting construct, best to keep an eye on the year-on-year growth in underlying profit, rather than the movement in statutory profit, which will be flattered by such a big accounting cost in last year’s numbers.

Barclays

Barclays has not been having a good time of it of late. After failing to cash in on the fixed income trading boom earlier in the year, the question is whether Barclays will nonetheless share the pain felt by the US investment banks from lower levels of activity in this area in the second quarter of the year. The prospect of regulatory action following the current CEO’s involvement in a whistleblowing case, combined with the former CEO John Varley appearing in court, will do little to bolster sentiment towards the bank.

Barclays’ forthcoming quarterly results face a headwind of around £1.2bn from the sale a big chunk of its stake in Barclays Africa Group. This sum will be written down, largely down to a weakening of the South African Rand since Barclays Africa was incorporated into the group’s accounts in 2005. The write down does not have an effect on Barclays’ CET 1 ratio however, and indeed when the African operations are separated from Barclays in the regulator’s eyes, the bank expects a 0.73% increase in this key measure of financial strength.

This set of results should draw a line under the non-core business unit, 6 months earlier than expected. The remaining £25bn of risk-weighted assets in this division will be split between Barclays UK and Barclays International, and we may get an update on how this will be divvied up in this week’s update.

This is a significant step for the bank. The drag on profits from the non-core unit has been considerable, and this marks the bank drawing a line under a large restructuring programme, though the dissolution on the non-core reporting stream leaves little for the bank to hide behind.

HSBC

HSBC reports next week on the back of a positive performance in the first quarter, and a share price which has appreciated by over 60% since the EU Referendum, despite a pretty shabby 2016 for the bank in terms of profits.

Much of the stock price movement is of course down to the fall in sterling, and given the size of the stock in the UK market, this meteoric rise goes a fair distance to explaining the strong performance of the FTSE 100 since the Brexit vote. On 23rd June 2016 HSBC made up around 5.5% of the benchmark index; it’s now closing in on 8%, and pushing Royal Dutch Shell for top spot – between them the two lines of Shell stock currently make up 9% of the FTSE 100. Yes, that’s right, two companies do now make up 17% of our FTSE 100.

The dividend at HSBC looks a bit safer than it did, and reported earnings this year should cover it, unlike last year. In 2016 earnings per share were 7 cents, compared to a 51 cent annual dividend. Consensus estimates are for earnings per share to rise to 51 cents in 2017, just about covering a dividend that is expected to stay put. That’s still not an awful lot of leeway, so UK investors’ best bet for a dividend rise in the short term is probably a further depreciation of sterling (HSBC posts its dividend in dollars).

RBS

The hills are alive with the sound of lawyers cashing cheques. RBS recently reached a settlement with the US Federal Housing Finance Agency which took the bank to task for its sale of around £25bn of residential mortgage-backed securities. The settlement will cost RBS £3.65bn.

This wasn’t entirely new news for RBS, but even known unknowns can be disturbing for shareholders (still mainly the UK taxpayer), particularly when they result in payments that have ten digits to the left of the decimal point. However RBS had already put a large amount of this money aside, leaving just a £151m blot on the forthcoming H1 results.

Consensus suggests RBS will book total of £248m in conduct and litigation costs in the second quarter and £2.2bn in 2017 as a whole, pushing the bank into a tenth consecutive year of reported losses. However much will depend on the timing, and the extent, of any action from the US Department of Justice, which is an unpredictable amount of heartache waiting for RBS shareholders in the not too distant future. While the figure is unknown, it also presents a major hindrance for RBS when it comes to passing the Bank of England’s stress test.

RBS is also expected to book around £1.2bn of restructuring costs this year, still a large number but significantly less than the £2.1bn realised last year. There’s still uncertainty over the replacement plan for the Williams & Glyn separation however, and further costs could be incurred on this front.

Along with the aforementioned litigation issues, RBS therefore still faces considerable headwinds, though if these abate over the next 12 months or so, the banking group could start to make some real progress on profitability. However, when it comes to reaching the breakeven point for the taxpayer, the share price still has a mountain to climb.

Share price/ £
At 23/06/2016 At 31/12/2016 At 25/07/2017
Barclays 1.87 2.23 2.10
HSBC 4.54 6.57 7.56
Lloyds 0.72 0.63 0.69
Royal Bank of Scotland 2.51 2.25 2.51

 

Year to Date share price movement Share price movement since EU referendum
Barclays -5.8% 12.3%
HSBC 15.1% 66.5%
Lloyds 9.5% -4.2%
Royal Bank of Scotland 11.6% 0.0%

Source: Thomson Reuters Lipper

 

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