You’d be forgiven for thinking the banking world was about to implode judging from the stock market reaction to results from UK lenders, Lloyds Banking Group PLC (LSE:LLOY), Barclays PLC (LSE:BARC) and NatWest Group PLC (LSE:NWG).
All three high profile names have seen their share price slump in the past week despite reporting cumulative profits of over £19bn, share buybacks of £3.3bn, bumper dividends for shareholders and big handouts for bosses and staff. So why the falls?
Much of the ‘disappointment’ has come not from the numbers themselves but the downbeat guidance that has accompanied them with investors concerned about what happens next when the earnings bonanza from rising interest rates dries up.
NatWest’s forecasts for income, costs and margins were worse than expected slightly offset by better news on bad debts.
While today, guidance from Lloyds on costs, margins and return on equity was below City hopes.
Gary Greenwood banking analyst at Shore Capital suggested the market may find the enhanced guidance given by the bank “a little disappointing”.
“Shouldn’t the banks be doing better this earnings season? Rising interest rates are usually a cause for celebration in the industry but instead of striking up the band the sector has just left investors feeling rather flat,” commented AJ Bell’s investment director, Russ Mould.
It could be a case of under promise, over deliver, learning from the playbook of high street retailer Next PLC (LSE:NXT) with the banks downplaying expectations ahead of what is likely to be a tough year economically.
This was certainly the feeling with today’s numbers from Lloyds Banking Group PLC.
The bank guided to expectations for net interest margins of 3.05% in 2023, well below the 3.20% forecast by rivals NatWest and Barclays.
Given margins were 3.22% in the fourth quarter and interest rates could move higher form the current 4% it suggested an overly cautious approach.
Greenwood also noted Lloyds is forecasting a return on total equity of around 13% in 2023, below rival NatWest’s target of 14-16%.
Broker Jefferies said the guidance looks “typically conservative at this stage of the year.”
Of course, making money as the economy slows down is a delicate balancing act.
As Mould pointed out, “The problem is that rates are rising at a time when the economy is slowing, a somewhat unusual situation reflecting the exceptional inflationary pressures facing central banks.”
“This means that while higher rates are boosting profit in the short term, they are creating a situation whereby lots of businesses and consumers are struggling to pay their debts.”
“A key feature of Lloyds’ latest update is the need to put aside more money to cover bad loans, with the bank already seeing modestly increased signs of stress out there.”
But one bright feature from the results has been on provisions, where all three lenders have reported bad debts lower than the City expected.
Given brighter anecdotal evidence from economic surveys there are growing hopes that the UK economy won't tank in 2023 and this could lead to some of those provisions being released.
So as you check your latest Lloyds savings rate of 0.6% on their Easy Saver account (full disclosure, I am a Lloyds customer) don’t fear too much for the future of the bank.
The banking team at Jefferies noted that even after today’s £2bn buyback (which they said “looks light”) there was still £1.3bn of excess capital while Shore’s Greenwood has pencilled in 2023 profits of around £7.18bn.
Given a soft landing and a fair economic wind in 2023, this time next year as we assess another banking reporting season we may end up wondering what all the fuss was about.