Shares of the five FTSE 100 banks have been under pressure in the year to date amid concerns about tough competition, tighter regulation and an uncertain economic outlook.
The FTSE All-Shares Banks index has fallen 18.5% so far this year, putting its shares performance 35th down the list of the 39 industrial groupings that make up the FTSE All-Share index.
Standard Chartered PLC (LON:STAN) is the worst performer with shares down 28.2% over the period followed by Barclays PLC (LON:BARC) and HSBC Holdings PLC (LON:HSBA), which have fallen 18.8% and 18.6% respectively.
Royal Bank of Scotland Group PLC’s (LON:RBS) shares have dropped 13.8% and Lloyds Banking Group PLC (LON:LLOY) shares have slipped 15.8%.
“RBS has been the best of a bad lot, with Standard Chartered, perhaps weighed down by concerns over its emerging markets, the worst of the FTSE 100’s Big Five, in share price terms,” said AJ Bell investment director Russ Mould.
READ: Royal Bank of Scotland jumps as it pays out first dividend since 2008 financial crisis
Global banking sector under the cosh
Mould said UK lenders are not outliers with the banking sector having performed badly on a worldwide basis this year.
The analyst said this “rotten showing” by the global banking sector does not sit well with the long-running equity bull market, given the important role lenders play in financial markets and the wider economy.
READ: UBS prefers Barclays, Lloyds and RBS despite worries about Brexit uncertainty
“It is to be hoped that this is not a subtle warning from Mr Market that there is something wrong with the financial markets’ plumbing or that the combination of record-high global debts, rising interest rates and a diminishing amount of monetary stimulus in the form of Quantitative Easing means the economic upturn is more fragile than we realise,” he said.
“In the specific case of the UK, the banking market is tightly regulated, mature and competitive. The arrival of savings bank Marcus is just one example of how challenger banks are nipping at the heels of the established players with its 1.5% easy-access account savings rate."
Tough competition in savings rates and mortgage lending
Marcus is the new UK online retail bank that Goldman Sachs launched in late September. The easy access account offers a savings rate of 1.5%, one of the best currently on offer.
READ: Goldman Sachs' new UK online retail bank challenges Lloyds, RBS, Barclays and HSBC
The introduction of Marcus adds to the tough competition the UK’s largest lenders are already facing in the savings market from smaller rivals. The mortgage lending market has also been fiercely competitive, weighing on banks’ net interest margins (NIM)– a measure of profitability.
“For well over a year, analysts have been arguing that rising interest rates would be good for the banks’ net interest margins and profits by allowing them to increase the cost of loans, keep funding costs low and pocket the difference,” Mould said.
“But the share prices of the five FTSE 100 banks do not seem to be listening as they have all fallen more rapidly than the headline index.”
Net interest margin a key focus for quarterly results
Investors will be paying close attention to NIM when the third quarter earnings season for UK banks begins on Wednesday with results from Barclays. Lloyds reports its third quarter results on Thursday followed by RBS the next day.
“Competition for deposits is driving cash savings rates (and therefore banks’ costs) up just as the variable mortgage market remains as cut-throat as ever, so it is possible that net interest margins are not going to expand as analysts had hoped, or perhaps at least not as quickly,” Mould said.
Aside from NIM, Mould also thinks investors and analysts will be interested in the headline profits and loan growth momentum.
Profits expected to rise above pre-crisis peak
Analysts expect the Big Five to make a combined pre-tax profit that exceeds 2007’s pre-financial-crisis peak of £35.8bn, he said.
“The banks have spent much of this decade nursing themselves back to health by shrinking and simplifying their businesses and it will now be interesting to see if they start to take more risk again in an attempt to grow profits by increasing revenues, not just cutting costs,” Mould said.
“Loan growth will therefore be important. It looked as if momentum was building as we entered 2018 but even HSBC and Standard Chartered showed a lower rate of loan growth in Q2 than they did in Q1. It must be noted that Barclays’ deconsolidation of its African operations explains a lot of the year-on-year drop in the size the bank’s total loan book."
'Costs will fall if banks can keep their noses clean'
He added that focus will also be on loan loss, impairment charges and restructuring costs as well as litigation and conduct provisions relating to such areas as claims for the protection payment insurance mis-selling scandal.
“The total cost of these items since 2013 has been some £123bn at the Big Five, compared to stated pre-tax profits of £80.6bn and aggregate dividend payments of £48.9bn over the same period,” Mould said.
“In sum, if the banks can keep their noses clean and themselves out of trouble, these costs could fall and profits advance sharply.”