It’s that time of year again for UK banks with the release of quarterly earnings set to kick off on Wednesday.
Lloyds Banking Group PLC (LON:LLOY) will be the first of the London-listed banks to report its third quarter results and investors will be keen to see whether it has been able to shrug off its ongoing legacy issues to deliver further growth.
Under the leadership of chief executive Antonio Horta-Osorio, the bank has had a successful turnaround since having to be bailed out by the government during the 2008-09 financial crisis. In May the group returned to private hands after reporting its highest full year profit in a decade.
In July the group reported is biggest half-year profits in eight years.
However, the company is continuing to tackle compensation claims related to its payment protection insurance (PPI) mis-selling scandal and has set aside more than £18bn in provisions.
The market will be paying close attention on any further costs relating to PPI claims in the third quarter update on Wednesday. Adding to its legal dramas, a trial brought against the bank by shareholders over its ill-fated takeover of HBOS in 2008 has started in the high court.
Another area of focus includes the implications of a slowdown in the UK property market, Brexit uncertainty, the prospect of higher interest rates and an unexpected rise in bad loans.
Following its acquisition of credit card business, MBNA, Lloyds is more exposed to the volatile sector and the Bank of England is putting pressure on lenders to tighten their standards after a surge in consumer loans.
Meanwhile, Lloyds recently announced that its Scottish Widows pensions and savings business has agreed to acquire Zurich’s £19bn workplace saving operation. Traders will be looking out for further comments on the bank’s plans for the business.
Barclays stockbroking arm under pressure
Much like Lloyds, Barclays has had to set aside provisions for PPI claims. Barclays swung to a first half loss after a £700mln provision for PPI and a loss on the sale of further stake in its Africa business as it focuses on its more profitable core businesses.
The group is also trying to resolve technical problems with its stockbroking arm that has prompted some of its clients to leave. Many Barclays clients have complained about having login-in problems and long waits after the bank moved 200,000 customers from its Stockbroker service to its new Smart Investors offering in August.
Credit Suisse said overall levels of client activity in the third quarter have been low and the same period a year ago delivered a strong performance.
RBS wrestles litigation and conduct charges
The lender posted its first half-year profit in three years in August as it cut costs as part of its ongoing restructuring.
However, RBS remains more than 70% owned by the government following its 2008 bailout as it wrestles litigation and conduct charges.
Following a £4.2bn payment to the Federal Housing Finance Agency in July to settle claims it mis-sold billions of dollars worth of toxic mortgage-backed bonds in the lead up to the financial crisis, RBS is facing a bigger fine from the US Department of Justice.
Subject to remaining legacy issues, RBS expects it will return to an annual profit in 2018.
Investors will be looking out for any changes to its guidance in the quarterly update as well as its progress in its restructuring. They may also want to hear further remarks on the lender's plans to set up a fund for challenger banks – a deal with the European Commission to get out of having to sell its Williams & Glyn under the conditions of its government bailout in 2008.
Consumer healthcare division in focus at GSK
Given the recent weak performance of Reckitt Benckiser Group PLC’s (LON:RB.) health division and rumours that both Pfizer Inc (NYSE:PFE) and Merck & Co Inc (NYSE:MRK) are looking to sell off their consumer businesses, GlaxoSmithKline plc’s (LON:GSK) consumer healthcare arm will be in focus in Wednesday’s third quarter update.
As the former head of that business, new chief executive Emma Walmsley will also have a particular interest in how it’s faring.
A solid performance over the past three months would not only bode well for the current brands – which include Sensodyne and Nicorette – but could also fuel rumours that GSK is on the lookout for some of its rivals’ unwanted assets.
Elsewhere, keep an eye out for another healthy performance from the FTSE 100 group’s HIV treatments Tivicay and Triumeq, as well as continued growth from new respiratory products to help offset declines in Advair and Seretide.
IAG to report quarterly revenue and earnings growth
The airline sector has taken some stick this year but IAG (LON:IAG), owner of British Airways, has flown above it all.
Ahead of third quarter results on Friday, the stock is up 47% year-to-date, helped by its focus on long-haul routes and the corporate market.
Most of the real vicious competition has taken place in the short-haul leisure market, resulting in the demise of the likes of Monarch Airlines and Air Berlin, and profit warnings from the likes of Flybe.
HSBC, which has a ‘reduce’ rating on IAG, expects the focus to be “revenue trends into the winter, aeropolitical issues around Brexit, broader economic and political issues in Spain, and IAG’s views on the recent industry consolidation”.
On the other hand, the company holds its capital markets day a week later so it may keep some powder dry in terms of commentary.
HSBC is forecasting a revenue per available seat kilometre (RASK) of 1.0%.
Cost per available seat kilometre (CASK), excluding fuel, is tipped to rise by 0.5% but including fuel CASK is forecast by HSBC to drop by 1.4% year-on-year, helped by a 6% drop in the fuel bill.
HSBC forecasts underlying earnings before interest and tax of €1,378mln, up 14% year-on-year, making it some way below the consensus forecast of €1,395mln.
Sales on the way at Shire?
ECB QE retreat expected
Away from the corporate news, the big focus will be on the latest European Central Bank council meeting, with economists expecting Mario Draghi & Co to finally announce a retreat on quantitative easing on Thursday.
In a preview, economists at UBS said they expect the ECB to announce that it will cut its monthly asset purchases from €60bn to €30bn as of January, with a commitment for nine months, until end-September 2018.
They added: “We think the ECB will leave open whether it will extend QE after September and hint that this decision will be taken in a data- dependent fashion, closer to the time. We believe the ECB will maintain a QE easing bias, indicating that it will stand ready to scale up QE again in the event of negative shocks.”
The economists concluded: “We think the Bank will once again commit to maintaining a ‘very sUBStantial degree of monetary accommodation’ in order to bring inflation back to the target.
Significant events expected:
Monday October 23:
Tuesday October 24:
Wednesday October 25:
Trading updates: Antofagasta (Q3), GlaxoSmithKline plc (Q3) (LON:GSK), Lombard Risk PLC (LON:LRM), Metro Bank PLC (LON:MTRO), Centaur Media PLC (LON:CAU), Cobham PLC (LON:COB), Lloyds Banking Group PLC (LON:LLOY)
Economic data: Second reading UK Q3 GDP; BBA UK mortgage lending data; German IFO business climate survey; US durable goods orders; US new home sales
Thursday October 26:
ECB interest rate decision
Interims: C&C Group PLC (LON: CCR)
Economic data: GfK German consumer confidence; US weekly jobless claims; US balance of trade; US pending home sales
Friday October 27:
Trading updates: Berendsen PLC (LON:BRSN), Elementis PLC (LON:ELM), Hastings Group Holdings PLC (LON:HSTG), Inchcape PLC (LON:INCH), Royal Bank of Scotland Group PLC (LON:RBS), Shire Plc (LON:SHP), International Consolidated Airlines Group PLC (Q3) (LON:IAG)
Economic data: Nationwide UK house prices; University of Michigan US consumer sentiment report