The UK’s “big four” banks may have come a long way since the 2008-09 financial crisis but Brexit and global trade wars have the potential to undo all their hard work.
Lloyds Banking Group PLC (LON:LLOY), Royal Bank of Scotland Group (LON:LLOY), Barclays PLC (LON:BARC) and HSBC Holdings PLC (LON:HSBA) have reported further progress in their restructuring efforts in the lenders' first half results over the past week.
RBS resumes dividends, says turnaround almost complete
The most noteworthy of the interims came from RBS last Friday as it resumed dividend payments for the first time since its £45bn bailout by the government in 2008.
The bank said it would pay an interim dividend of 2p after drawing a line under its last major litigation issue with the US$4.9bn to settle an investigation by the US Department of Justice over the sale of mortgage-backed securities between 2005 and 2007.
The settlement led to a 5.4% fall in first-half attributable profits to £8.8mln but it prompted the government to reduce its stake to 62.4% from 70.1% in June. The resumption of dividends also paves the way for further share sales.
READ: RBS shares rise as it looks to pay first dividend since financial crisis, posts first half profit
RBS chief executive Ross McEwan said the restructuring was almost complete and expects payouts to shareholders to increase “materially from here”.
The bank intends to raise dividend payouts to 40% of earnings by 2020 and is considering share buybacks next year. It has a dividend yield of 3.2% for the year, according to the consensus forecast. That compares to a projected dividend yield of 5.4% for Lloyds and HSBC, and 3.4% for Barclays.
Brexit could undermine future RBS dividends
However, McEwan warned that Brexit could derail large payouts to investors, pointing out that the economy had already slowed amid the uncertainty. He also said the competitive mortgage market was putting pressure on the bank’s net interest margin (NIM), which fell to 2.02% in the first half from 2.18% last year.
Worries about the potential impact of Brexit has seen UK banking shares fall some 6% for the year, against a broadly flat FTSE All-Share index. That puts the banking sector 32 by performance out of the 39 industrial groupings that make up the All-Share benchmark.
Last week, Bank of England Governor Mark Carney said Britain faces an “uncomfortably high” risk of leaving the European Union without a deal in March 2019, putting the financial services industry under threat.
Banks are set to lose their passporting rights, which allow EU finance companies to sell their services across the bloc without the need for a license to operate in each member country.
Lloyds remains upbeat about UK economy despite uncertain outlook
Lloyds is heavily exposed to the UK economy and consumer debt in particular but chief executive António Horta-Osório delivered an upbeat statement about the outlook in the group’s first half results last Wednesday.
Horta-Osório said the UK economy has continued to “demonstrate resilience” and played down worries about household debt by saying it was still 25% lower than before the financial crisis.
READ: Lloyds first-half profits rise 23% despite extra £460mln provision for PPI claims
The bank, which returned to private ownership last May nine years after its £20.3bn government bailout following a successful turnaround under Horta-Osório, also managed to shrug off pricing pressures in mortgages. Growth in its MBNA credit cards business led to an increase in the banking NIM to 2.93% in the first half from 2.82% last year.
Horta-Osório expects the UK will achieve a Brexit deal with the EU by November 30 when the government presents a proposal to MPs.
In preparation of Brexit, Lloyds is setting up a subsidiary in Berlin to ensure it can continue business across the EU.
Lloyds still tackling legacy issues
Another uncertainty hanging over Lloyds is the outcome of settling legacy issues. These include compensation to victims of fraud at its HBOS unit in Reading and the payment protection insurance (PPI) scandal, which has cost the bank £19.2bn so far and could creep higher before the Financial Conduct Authority's deadline for complaints.
The lender’s ability to keep up its generous dividend payouts is therefore at risk should earnings take a hit from an economic downturn or litigation costs. It paid an interim dividend of 1.07p, compared to 1.0p last year as it posted a 23% increase in first-half pre-tax profit to £3.1bn.
Barclays faces fine for Qatar fundraising
Litigation and settlement costs have equally weighed on Barclays. On Thursday, it posted a drop in first-half pre-tax profits to £1.7bn from £2.3bn a year ago after paying £1.4bn in March to settle a lawsuit with the US DoJ over the sale of mortgage-backed securities and a £400mln provision for PPI claims.
READ: Barclays first half profits slide as litigation and conduct costs bite
However, second quarter pre-tax profit almost trebled to £1.9bn as it was the first time it had not paid any significAnt litigation or conduct charges, restructuring costs, or other exceptional expenses
The bank is not out of the woods yet though in light of news that the UK Serious Fraud Office has applied to the high court to revive its case over the bank's 2008 fundraising with Qatar.
Barclays under pressure from activist investor
It also faces pressure from activist investor Edward Bramson to revive the investment bank. Bramson wAnts to shut down almost all trading activity in the division to cut costs and deliver greater returns.
The investment bank showed an improvement in the first half with income rising 1% to £5.4bn, largely due to a strong performance in the equities division.
The lender was hit by fierce competition in mortgages, however, with the NIM falling to 3.24% from 3.69% in the UK business.
Barclays raised its interim dividend to 2.5p from 1.0p last year and reaffirmed its commitment for a payout of 6.5p for 2018.
US-China trade tensions a potential threat to HSBC
HSBC left its dividend for the half-year at US$0.31 as it posted a 4.5% increase in pre-tax profit to US$10.7bn.
Since HSBC is Asia-focused with the region accounting for 88% of total pre-tax profit in the first half, the group is less exposed to the UK’s economy.
READ: HSBC's first-half profits beat expectations as investment strategy pays off
Instead, trade tensions between the US and China are the biggest threat to the company. HSBC is expanding in China and investing in improving its technology at retail operations in the nation as part of a three-year strategy announced in June.
Over the three-year period, HBSC is going to spend between US$15bn and US$17bn, switching from a strategy of cost-cutting and restructuring to investment and growth. But proposed US trade tariffs on Chinese goods and vice versa could hinder growth in the world’s two biggest economies, possibly making it harder for HSBC to continue to deliver strong results from Asia.