Lloyds Banking Group PLC (LSE:LLOY) and HSBC Holdings PLC (LSE:HSBA) are expected to lead the sector with strong buybacks and signals for more special shareholder distributions when banks report in the coming weeks.
Reporting for the sector season starts with NatWest Group PLC (LSE:NWG) next Friday, 16 February, then continues the week after with Barclays PLC on Tuesday, HSBC on Wednesday, Lloyds on Thursday and Standard Chartered PLC (LSE:STAN) is the last of the blue-chip lenders on Friday 23.
A softer finish to 2023 has generally been well-flagged, said Barclays research analyst Aman Rakkar in a sector preview, and subdued guidance for 2024 should be expected.
Rising deposit costs and weak mortgage margins are set to drive the Q4 declines in net interest margin – the difference between interest charged for lending and paid on borrowing – while uncertainty around rate cuts is the big challenge to issuing margin guidance, "which may drive conservatism".
However, the operating backdrop is improving, said Rakkar, seeing medium-term guidance as "perhaps more instructive" and expecting fading headwinds to help contribute to driving a recovery in earnings into 2025 and beyond.
But most of UK banks, "except NatWest", are expected to announce open-market share buybacks alongside results.
This includes £2 billion at Lloyds, even though the analysts acknowledge the "new uncertainty" raised by the FCA's review of motor finance
There is also scope for HSBC to signal for further special distributions, given the confirmed closure of sale of its Canada business, Rakkar said, but cutting his share price target to 800p from 900p.
Despite not being included in the buybacks gang, NatWest is the top pick for the sector as the analyst expects "the faster rebound in earnings and see the valuation compelling" at less than five times 2025 forecast earnings compared to 6.2 times for the European sector average.
StanChart is the bank about which Rakkar is most cautious, expecting lower 2025 earnings than other City analysts and a reveal in return momentum, and cutting his price target to 650p from 850p.
Lloyds, NatWest and HSBC are all rated 'overweight' by the analyst and StanChart 'equal-weight'. Price targets for Lloyds and NatWest were uncnaged at 65p and 330p respectively.