UK bank results season: a preview and top stock picks
On the eve of reporting season for the UK banking sector, City writer Graeme Evans reveals what a group of experts thinks about prospects for shares in these domestic lenders.
17th July 2024 14:05
by Graeme Evans from interactive investor
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Favourable conditions for Britain’s big lenders have fuelled hopes that next week’s half-year results by Lloyds Banking Group (LSE:LLOY) and NatWest Group (LSE:NWG) will give a leg-up to the sector’s revival.
Higher-for-longer interest rates, the easing of mortgage margin pressure and little sign of asset-quality deterioration have boosted demand for the previously out-of-sorts sector.
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NatWest and Barclays (LSE:BARC) shares are up some 50% so far this year, with Lloyds ahead by more than 20% and also a top pick for a number of City institutions. The shares of Asia-focused HSBC Holdings (LSE:HSBA) and Standard Chartered (LSE:STAN) have lagged the trio, up by about 5% and 12% respectively.
In its results season preview, Morgan Stanley picked Barclays for close attention due to its additional exposure to the recovery of investment banking activity in the United States.
It said last week: “We believe there is upside to revenues in both UK margins and investment banking fees, while the market is under-appreciating the recovery in US asset quality.”
Recent M&A and debt market activity means the City bank is 11% ahead of the consensus on Barclays’ investment banking fees, fuelling its “overweight” stance and 290p target price.
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Barclays rounds off the UK earnings season on 1 August, with optimism further boosted by the forecast-beating figures of JPMorgan Chase & Co (NYSE:JPM), Bank of America Corp (NYSE:BAC) and other Wall Street banks.
Morgan Stanley’s top pick in UK banking is Lloyds, having recently valued the shares at 68p with an overweight recommendation. Its forecasts for 2024 include growth in the total dividend to 3p a share, including 1p with the results on Thursday 25 July.
Next week’s figures are likely to represent a transition quarter for the UK’s biggest lender, with the net interest margin likely to be down slightly to 2.93%.
However, Morgan Stanley expects an improvement in trends across the industry heading into 2025.
The use of structural hedges, where banks defer the benefit of rising rates to periods when this income is expected to be more valuable, have boosted the outlook.
UBS said recently that these risk-management positions should add 6-7% to the UK sector’s net interest income in 2024 and 2025, equivalent to 10% to pre-provision profit in each year.
The industry’s favourable backdrop comes with Bank of England monthly data continuing to show stability in deposit balances and mix, fuelling hopes that the first or second quarters will represent the trough for margins.
Morgan Stanley said: “With the worst of the mortgage margin pressure over, we see growth in the second half of 2024, out to 2025-26 driven by structural hedge re-investment.”
It adds that mortgage applications have stabilised since the spring and with no sign of asset-quality deterioration it believes capital generation should remain strong.
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NatWest is due to report its half-year results on 26 July, having posted quarter-on-quarter growth in its operating profit to £1.3 billion in April. The net interest margin of 2.05% was six basis points higher than the fourth quarter.
It has benefited from interest rates remaining at 5.25% throughout the first half, higher than NatWest’s opening projection for two cuts in the period.
Broker Peel Hunt recently raised its dividend forecast for this year from 15.9p to 17p, followed by increases to 18p and 20.7p to reflect higher earnings per share estimates. The dividend rose by 22% last year, when the bank returned £3.6 billion to shareholders.
NatWest is committed to a 40% payout ratio with capacity for share buybacks. This is underpinned by a pledge to maintain a CET1 capital ratio within a range of 13-14%.
Peel Hunt has a price target of 385p but Morgan Stanley is more cautious, believing that interest rates of 5.25% will lead to more margin pressure than the consensus is factoring in.
It added last week: “We are equal-weight the stock, as we believe it will deliver less net interest income recovery than peers, due to its higher-rate sensitivity.”
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