UK bank sector results preview Q2 2023

Lloyds kicks off quarterly results season for the domestic banks this week. Richard Hunter explains what to expect from the Big Five lenders.

The imminent half-yearly reporting season will provide some colour in the UK banks’ response to the recent banking turmoil, the ongoing effects of a rising interest rate environment, and whether loan impairment provisions have been raised given the possibility of recessions this year in some developed economies.

The fact that UK banks breezed through the recent Bank of England stress tests is an encouraging sign. The banks are expected to report high CET1 ratios (the capital cushion), while in terms of key metrics, there should also be improvements to Net Interest Income, Net Interest Margin and Return on Tangible Equity.

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Shareholder returns via both dividends and share buybacks will also be in focus, with the current and generally high levels of dividend yields expected to be consolidated.

In terms of share price performance, there is currently an interesting divide between momentum and outlook. For the former, the primarily Asia-facing banks, HSBC (LSE:HSBA) and Standard Chartered (LSE:STAN), have been beneficiaries of the reopening of the Chinese economy post-Covid 19, even though the current macro prospects for the region are less certain.

In terms of outlook and the market consensus, NatWest (LSE:NWG) is currently the preferred play in the sector, which could partly be the result of a solid and dependable, if a little unexciting, performance following the recent banking turmoil.

At Barclays (LSE:BARC), the diversity of the group’s businesses is a boon through the various economic cycles and, to some extent, the three main units are all hitting something of a sweet spot. Unsurprisingly perhaps, the only recent words of caution relate to the US presence, from where the recent banking turmoil emanated.

Most of Barclays’ previously announced credit impairment figure, which rose to £524 million for the quarter from £141 million previously, related mainly to the Consumer, Cards & Payments (CC&P) for US card balances. However, these were provisions, not actual losses, and a prudent approach to an economy which could be approaching a recession is understandable.

Set against the wider banking turmoil of recent months, the performance which NatWest delivered at its first-quarter results was just what the doctor ordered for more risk-averse investors. At the same time, the group’s lending and mortgage growth in particular remained strong, while higher trading volumes made a notable impact.

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The bank has described its own “intelligent approach to risk” as including a proactive attitude for those customers who may be approaching some level of financial strain. As such, the level of customer defaults remained low for both the retail and corporate businesses (indeed, the latter released some provisions), and the group’s modelling also highlights red flags as they emerge.

The government’s remaining stake in NatWest of around 43% is something of an overhang for the shares, although the commitment to continue to whittle it down further has already been declared. Indeed, in these circumstances such demands on the bank’s capital are ones which it can comfortably cater for.

Lloyds Banking Group (LSE:LLOY) has again been exhibiting its traditional strengths of efficiency, profits and generous levels of shareholder returns. Lloyds is a particular beneficiary given its UK focus and business model. Net Interest Income rose by 49% as announced at the first-quarter update, while the continued strength of its significant mortgage book was again in evidence. The move towards a more digital business will reap large rewards as the process evolves, with the closure of office space and branches a reflection of the times as customer behaviour changes.

Lloyds also retained its crown in terms of efficiency in the UK banking sector, with a cost/income ratio of 47.1%, although the share price has had to contend with the group’s reputation as being something of a barometer for the UK economy, which has not been a comfortable ride.

While HSBC may have found growth hard to come by over recent years, its sheer scale and financial strength sets it apart in times of turmoil, as recently witnessed in the banking sector. The acquisition of Silicon Valley Bank UK, for which the bank booked a provisional gain of $1.5 billion, could prove to be an extremely profitable strategic move.

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As of the first quarter, Global Banking and Markets saw spikes in foreign exchange and debt trading markets, while the Wealth and Personal Banking unit reaped the benefit of increased customer activity following the reopening of the mainland Chinese border post-pandemic restrictions. Financial largesse was extended to shareholders with the announcement of a share buyback programme of up to $2 billion.

Standard Chartered could be edging towards a return to its previous status, when as something of a darling in the UK banking sector, prospects of global growth drove investor interest. Its attraction of late culminated in the rumoured bid from First Abu Dhabi Bank, which ultimately came to nothing other than putting Standard Chartered on the list of speculative bid targets for the future.

The bank’s exposure to the China commercial real estate sector has been less positive, and recently resulted in a credit impairment of $582 million being taken. However, the group estimates that GDP growth in Asian economies generally will grow by more than 5% for the next two years, and with Standard’s established and trusted presence in the region, the bank is perfectly positioned to capitalise on such a return to form.

In the meantime, growth of 74% in adjusted profit for its core Asian business at the first-quarter update could be an early indication that fortunes are improving.

At a glance summary table: