Barclays PLC (LON:BARC) will on Thursday fire the starting gun on the first quarter earnings season for UK banks.
Investors will have a keen eye on net interest margins (NIM), costs and bad loans across the sector.
Margins squeezed
Banks’ NIM – the difference between interest earned on loans and money paid on deposits – have been squeezed by tough competition in the mortgage lending market and low interest rates.
Analysts had been expecting NIMs to improve as interest rates rise.
However, interest rates have barely moved and NIMs have either shrunk or risen at a slower-than-expected pace.
“This is because the banks have faced higher funding costs on one side (as they offer higher deposit rates to attract customers, lose the cheap Term Funding Scheme cash from the Bank of England that expired last year and encounter greater wholesale costs as lenders fight shy of the UK pre-Brexit) and pricing pressure on the other, as lenders compete to offer mortgages and loans,” AJ Bell investment director Russ Mould said.
“Lloyds seems to be doing the best job of countering these headwinds but further progress is needed if banks’ earnings are to start powering higher.”
Legacy issues and bad loans continue to weigh
On costs, Mould said the big five have spent £24.3bn on restructuring efforts since 2013 in a bid to save costs and improve efficiencies.
While banks have made some progress on trimming costs, the sector has had to cough up money for conduct charges and upgrading their technology to keep up with online rivals.
Bad loans are another area of focus.
Mould said aggregate charges for bad loans came in at £4.8bn in 2018, much lower than in recent years.
“Sceptics could argue that the only way is up from here, especially if the UK economy and its housing market start to turn lower,” he said.
“But supporters of the sector will be looking to the banks to lend sensibly, manage risk and thus keep impairments at these welcome low levels.
“If they can, then profits could rise, especially if net interest margins increase to boost income and costs are kept under control.”
Barclays to swing to profit with investment bank in focus
UBS expect Barclays to swing to a pre-tax profit of £1.43bn in the first quarter from a £236mln loss last year when the bank had to fork out US$2bn to settle a lawsuit in the US over the sale of mortgage-backed securities.
Total revenue is expected to rise to £5.38bn from £5.36bn. Costs are projected to rise to £3.50bn from £3.36bn.
“We expect NIM below 320 basis points (bps) in 1Q19 and attention on volume growth and competitor (especially HSBC) behaviour,” UBS said.
“Barclays' emphasis on mortgage lending alone should see margins fall in the year on mix, in our view.”
Barclays will need to show shareholders that is on track to turn around the investment bank amid pressure from activist investor Edward Bramson.
Bramson, whose vehicle owns a 5.5% stake in Barclays, wants to see the investment bank scaled back and has called for a seat on the board.
UBS predicts pre-tax profit at the investment bank will drop to £688mln in the first quarter from £1.17bn last year.
RBS profits to fall with shareholder returns eyed
First quarter results from Barclays will be followed by Royal Bank of Scotland Group PLC (LON:RBS) on Friday.
UBS predicts first quarter adjusted pre-tax profit of £986mln, down from £1.4bn a year ago, and adjusted income falling to £3.12bn from £3.29bn. Total costs are predicted to fall to £1.74bn from £1.78bn.
At its fourth quarter results, RBS said new mortgages continue to be written at 80-90bps below back-book spreads but UBS noted that part of the margin headwind was being addressed by efforts to improve customer retention rates.
Fourth quarter NIM improved 2bps to 197bps compared to the previous three months, supported by unwinding of liquidity.
“RBS continues to have a very liquid balance sheet,” UBS said.
“Pending Brexit clarity, we'd expect further deployment of this liquidity to support declared margins, albeit at modest benefit to group pre-tax profit.”
Lloyds 'undervalued', says UBS
High street bank rival Lloyds Banking Group PLC (LON:LLOY) reports its first quarter results next Thursday.
The investment bank predicts Lloyds will report underlying pre-tax profit of £2.02bn, compared to £2.00bn last year, on total income of £4.55bn, down from £4.58bn.
The NIM is estimated to edge down to 2.91% from 2.93% and costs are expected to dip to £2.06bn from £2.07bn.
“We think Lloyds is an undervalued, strongly capital-generative bank, operating with a cost advantage in a competitive market,” UBS said.
UBS expects Lloyds to pay dividends and share buybacks worth 8-9% of market capitalisation this year.
UBS has a 'buy' recommendation on Lloyds, RBS and Barclays.