As we approach the third-quarter earnings season for UK banks, investors are likely to find a continuation of previous quarter's trends for domestic players, Lloyds, Barclays and NatWest.
Expect to see ongoing mortgage margin pressure and an unfavourable deposit mix, counterbalanced by benefits from hedge income and benign credit conditions, analysts said.
Calendar
Barclays PLC (LSE:BARC): Tuesday, 24 October
Lloyds Banking PLC: Wednesday, 25 October
Standard Chartered PLC (LSE:STAN): Thursday, 26 October
NatWest Group PLC (LSE:NWG): Friday, 27 October
HSBC Holdings PLC (LSE:HSBA): Monday, 30 October
Outliers?
Both Barclays and NatWest have seen downgraded earnings estimates reflecting incremental margin pressure and slower balance sheet growth.
Barclays has revised its UK net interest margin down by 8bps, while NatWest, which also lost its CEO and chairman over the Farage furore, guided to an 11bps drop in NIM for the full year but is in a calmer place this month.
UBS felt high street lenders are attractively valued but the third quarter is unlikely to unearth any major catalysts.
While shares in Asia-focused pair HSBC and Standard Chartered have been the outliers, outshining their domestically-focused counterparts, Lloyds could be the best of the rest.
This hinges on whether it decides to initiate fresh buybacks, said Jefferies, eyeing a potential £0.5 billion share buyback on results day.
"Many investors rate this as a remote possibility given LLOY's track record of making such distributions annually," they wondered. "Our simple point is: Why should LLOY sit on unproductive capital until late Feb 2024?"
Adjacently, Barclays buybacks have most disappointed investors, with the lowest payout ratio among its peers.
Venkatakrishan this summer confirmed he plans to give investors clearer financial targets around return on tangible equity and shareholder payouts.
"We expect that update at 4Q23, but predict a reasonable flow of 3Q Q&A that attempts to reveal where that process is headed," said Jefferies.
Analysts at Berenberg said this is the reason the shares have been subdued, allied to an outlook of “extreme” pessimism in the investment banking sector.
“Barclays’ valuation is subdued, even relative to global IB peers. This is hard to justify given its presence in the US market (where returns are higher than in Europe) and market share gains (including versus US peers),” Berenberg said.
Looking ahead to 2024
Investors are beginning to set their sights on 2024 earnings. While asset growth might be challenging, tailwinds from structural hedge income are expected.
A structural hedge is a strategy banks use to protect themselves against interest rate changes, typically by matching long-term loans with short-term borrowings. A tailwind occurs when rising interest rates increase the income the bank earns from this hedge, thus boosting its profits.
Both Barclays and Lloyds have indicated potential for upside from the hedge, especially with rates being higher now than when these forecasts were last reiterated at the half-year stage.