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RBS to report strong first quarter profit but will continue to lag behind Lloyds

Lloyds, RBS, Barclays and HSBC will start reporting first quarter results from next week
RBS
RBS to post a much-improved first quarter after an eye-watering annual loss

Royal Bank of Scotland Group plc (LON:RBS) is expected to once again lag behind Lloyds Banking Group (LON:LLOY) when the lenders report their first quarter results next week.

When Lloyds posted its full year results in February, the lender revealed its highest annual profits in a decade of £4.24bn compared to £1.6bn a year earlier. In contrast, RBS reported an eye-watering annual loss of £6.95bn, compared to £1.97bn a year earlier.

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Sector peers Barclays plc (LON:BARC) and HSBC Holdings (LON:HSBA) were somewhere in the middle of the two with their full year results. 

A similar order of affairs is expected when the UK banks unveil their quarterly earnings.

Strong quarter for financials but low interest rates putting pressure on margins... 

Kathleen Brooks, research director at City Index, said financials have had an overall “fantastic” first quarter. 

 

But UK banks are facing ongoing margin pressure due to a competitive mortgage lending market following the Bank of England’s decision to cut its base interest rate to 0.25%.

Lenders have been engaged in a pricing war by offering low interest rates to attract prospective homebuyers deterred by mounting political and economic uncertainty.

Yorkshire Building Society has brought mortgage rates to a record-low by offering a mortgage rate of 0.89%.

Citigroup said such pressure on margins will see banks report a drop in net interest margins (NIM) in the second quarter. For the first quarter, however, Citi expects a rise in NIM.

“We expect to see a small increase in UK loan losses in 2017, mainly driven by an absence of mortgage write-backs vs 2016,” Citi added.

“We also fear that we are reaching a turning point in the consumer finance cycle.”

According to a BoE survey, a net balance of 18.8% of British lenders plan to rein in the supply of credit to consumers in the next three months, which has added to worries about the economic outlook as Brexit negotiations get under way.

Lloyds first up...

Lloyds, which is edging closer towards full privatisation after the government cut its stake to below 2% earlier this month, will be the first to post its quarterly results on 27 April and analysts anticipate a sUBStantial dividend payment and robust profits.

UBS expects pre-tax profits nearly doubled in the first quarter to £1.21bn from £654mln a year earlier, largely due to absence of last year’s £790mln cost of buying back high income bonds.

As for dividend payments, Deutsche Bank believes the bank will reward shareholders sUBStantially after announcing a special dividend at the full year. 

Lloyds has said it expects ordinary dividends to increase "over the medium term" with a payout ratio of at least 50% of sustainable earnings.

Deutsche said “Lloyds has paid a special dividend for two years and we expect this to continue, and to be a larger size. We expect a dividend yield of 8% for each of the next three years.”

Lloyds’ performance, however, is exposed to macro-economic uncertainties, including Brexit and the general election, as a UK-focused lender so its outlook will be in focus.

The bank has also had its hands full with legal dramas stemming from its HBOS subsidiary.

Six people were jailed earlier this year over fraud involving two former bankers at the HBOS Reading branch who helped siphoned off money from struggling businesses, which were clients of the business.

Lloyds, which bought HBOS in a rescue deal during the 2008 financial crisis, said on Friday it was setting aside £100mln to compensate victims. The provision will be included in the first quarter.

The bank also faces trial in October over its acquisition of HBOS. The bank is accused of failing to disclose the extent of the financial difficulties of HBOS ahead of the takeover.

In a separate legacy issue, Lloyds said last month it was putting aside a further £350mln to cover claims for mis-sold payment protection insurance (PPI) after the FCA moved its deadline for new complaints.

As it continues to deal with legal bills, Lloyds has been cutting jobs and branches across its UK network to reduce costs and invest in its digital offering. Lloyds has said its decision to reduce its branches was in response to a switch by its customers towards online banking. 

RBS to trail behind Lloyds...

First quarter underlying profits at RBS are expected to double to £942mln, compared to £440mln a year earlier, helped by its private banking arm and personal and business banking division. 

While that means RBS will still trail behind Lloyds, it offers some respite to the bank following its dismal annual results.

The bank's progress on its restructuring is likely to be under the microscope as it cuts costs by getting rid of jobs and branches. 

Its quarterly results come in the wake of Chancellor Philip Hammond's comments that the government was likely to sell down its 73% stake in the lender at a loss. 

RBS is also waiting on the outcome of the Europe Commission's investigation into the government's proposal to ditch plans to sell the bank's Williams & Glyn business and instead set up a fund to help challenger banks.

This move could boost core earnings by around £300mln, according to Berenberg.

“We believe these benefits outweigh our expected £1.1bn cost of restructuring and reintegration (of which £750mln has occurred),” the bank said.

“Put differently, while the proposal reduces excess capital by 20p, RBS retains a business worth 30p and gains incremental certainty about the timing of capital returns.”

However, the total cost of the measure could be as much as £1.5bn, a document drawn-up by the Commission ahead of a consultation on the plan showed.

The lender is also facing a £125mln bill for legal costs as it defends itself against accusations of misleading investors over its financial position in the lead up to its 2008 rights issue.

RBS took a £3.1bn provision in its results to cover an expected US fine in its full year results over the way it packaged and sold mortgage backed securities.

Barclays to report healthy quarter...

Barclays plc (LON:BARC), which reports its first quarter results on 28 April, is expected to post a “very good first quarter”, according to Brooks.

The bank in February revealed annual profits tripled to of £3.2bn from £1.2bn the prior year as it sold off non-core units. Non-core units, which generated a full year loss, will be closed by 30 June.

Deutsche Bank left its forecasts for the current year unchanged, and nudged up forecasts for next year and the year after by 3%.

However, it noted that key downside risks relate to the cost of regulatory change, litigation, disappointing capital markets, an unexpected spike in credit costs, adverse outcomes on pension triennial agreement, and economic uncertainty on implications of Brexit.

Barclays is still yet to put its most prominent scandal to bed after being fined £290mln by US and UK authorities in 2012 for rigging Libor, which sets the rate at which banks can borrow from one another. 

Earlier this week, the BBC 1’s Panorama programme said it had obtained a recording of a 2008 call between two bankers at Barclays in which one of them said the government and the Bank of England were putting pressure on the lender to lower the rate it offered for Libor.

At the same time in a separate issue, Barclays released a statement saying it was being investigated by the Financial Conduct Authority after boss Jes Staley had “mistakenly” tried to unmask the identity of a whistleblower.

The FCA has also reportedly re-opened its investigation into Barclays' 2008 emergency fundraising from Qatar after the bank handed over about 100,000 documents to the Serious Fraud Office.

Emerging economies to boost HSBC...

HSBC Holdings (LON:HSBA) is the last to report its first quarter with results scheduled for 4 May and like its peers, legacy issues also plague the bank. 

The group is heading to court to appeal a €33.5mln penalty by the European Commission in December 2016 for allegedly colluding with other banks to rig Euribor, a key financial benchmark, between September 2005 and May 2008.

The bank posted pre-tax profit of US$7.1bn in 2016, down from US$18.9bn the previous year, reflecting a US$3.2bn impairment of goodwill in the company’s global private banking business in Europe and the impact of the sale of its operations in Brazil.

The group said incremental growth was expected to be driven by emerging economies in which HSBC is well represented. However, it warned of risks including political uncertainty surrounding European elections, the impact of a stronger dollar against currencies in emerging economies and the unknown outcome of Brexit negotiations.



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