Bad loans, legacy issues and tough competition in mortgage lending are among some of the key areas of focus for investors when UK banks begin reporting on Wednesday.
Lloyds Banking Group (LON:LLOY) will kick things off on Wednesday with its interim results which are expected to show a drop in second-quarter profits.
Despite a successful turnaround under chief executive Antonio Horta-Osorio, the bank is still dealing with the repercussions of past misconduct including a payments protection insurance (PPI) mis-selling scandal and fraud at its HBOS unit in Reading.
Lloyds has so far paid out £18.8bn in compensation for the PPI saga and is facing further claims from victims ahead of the Financial Conduct Authority’s August 2019 deadline.
The lender has also set aside £100mln to compensate victims of the HBOS loans scam, which left several businesses in tatters. But ‘Deal or No Deal’ TV star Noel Edmonds, who is seeking £64mln in damages on claims the fraud destroyed his business Unique Group, reckons Lloyds may end up having to fork out more than £1bn in damages.
READ: Lloyds may need to pay more than £1bn for HBOS Reading fraud, says Noel Edmonds
On top of the legacy issues, Lloyds is tackling sector-wide competition in mortgages, which has squeezed lenders’ net interest margin (NIM) – a measure of profitability.
Deutsche Bank expects the group’s margin to be 2.90% for the second quarter, down slightly on the 2.93% reported in the first quarter but in line with the guidance for 2018.
UBS predicts Lloyds will report underlying profit of £1.8bn for the second quarter, down from £2.0bn the previous quarter. Statutory pre-tax profit for the quarter is expected to fall to £887mln from £1.6bn, including £410mln for PPI provisions, £262mln in restructuring costs and a £110mln loss on the disposal of its Irish residential mortgage portfolio to Barclays PLC (LON:BARC).
Bank of England rate hike a double edge sword
While an expected interest rate hike by the Bank of England on Thursday would provide a welcome boost to banks’ margins, it could also weaken demand for mortgages.
Brexit uncertainty, falling house prices in London and the impact of IFRS 9 accounting standards present further challenges for banks.
The market will also look at lenders’ bad loans following rapid growth in consumer borrowing, including car finance and credit cards. Such loans offer higher returns but increased risk.
Barclays under pressure to deliver results
Barclays PLC (LON:BARC) reports its interims on Thursday with the focus on the performance of its investment bank following recent signs of recovery.
The bank is potentially set to face pressure from US activist investor Sherborne, which took a 5% stake in the group earlier this year, to deliver results.
Sherborne has previously used stakes in UK firms, such as private equity firm Electra, to oust executives and demand radical overhauls to boost returns.
Improved income at the investment bank helped Barclays to report better-than-expected first quarter profits and investors hope the momentum continued into the second quarter.
“If Barclays fails to get a slice of what’s been a bumper investment banking season on Wall Street then questions will be raised about the strategy of maintaining a transatlantic investment bank strategy,” said George Salmon, equity analyst at Hargreaves Lansdown.
“With some unpleasant rumblings from the UK housing market, the UK high street bank deserves its fair share of scrutiny as well.”
There have also been concerns raised following recent news that the UK Serious Fraud Investigation is set to reinstate charges over its fundraising in 2008 with Qatar.
READ: Barclays says UK SFO has made an application to the High Court to reinstate charges dismissed in May
Meanwhile, the group’s NIM could take another hit from fierce competition in mortgages and the end to the government’s funding for lending scheme in January. NIM is expected to drop to 3.25% in the second quarter from 3.27% in the first three-month period.
UBS has forecast first-half adjusted pre-tax profit of £1.3bn, down from £2.3bn last year, on the back of restructuring costs.
Timing on dividend resumption a key focus for RBS
Royal Bank of Scotland Group PLC (LON:RBS) is the last of the bunch to report for the week, publishing its interims on Friday.
The focus will be on the progress of the bank’s restructuring and the timing of the resumption of dividend payments.
“The CEO's restructuring plans will shrink the group further through to 2020 and will shift its business towards retail and commercial banking,” said Graham Spooner, Investment Research Analyst at The Share Centre.
RBS is reportedly considering asking the Prudential Regulation Authority for permission to restart dividends at a level that could rival Lloyds. The bank has been barred from paying dividends since it was bailed out by the government 10 years ago during the financial crisis.
However, RBS has nursed itself back to health, reporting its first annual profit in a decade in February and putting the last of its major legacy issues to bed by settling a US investigation into the mis-selling toxic mortgage-backed securities in May.
The progress made the bank prompted the government to begin selling down its stake again in June. The government sold a 7.7% stake, reducing its holding to 62.4%.
READ: UK Govt marks Royal Bank of Scotland’s decade of woe with £2.5bn share sale
UBS expects the group to report a second-quarter adjusted pre-tax profit of £1.3bn, down from last quarter’s £1.4bn.
“Most important of the events of 2Q18 to consider, we think, are the consequences of closure on the residential mortgage-backed security and pension funding issues and what this means for the timing of any capital release to shareholders by dividend and buyback,” the investment bank said.
It also thinks investors will assess the NIM in light of the bank’s past attempts to price mortgages higher against the backdrop of competitive pricing conditions, as well as cost reduction measures – an “area of strength for the bank in the past and a driver of fairly volatile restructuring charges”.