logo-loader

Lloyds, HSBC continue banking results season; mining giants also in focus

Last updated: 06:00 17 Feb 2020 GMT, First published: 14:29 14 Feb 2020 GMT

HSBC -

Britain’s two biggest banks reveal their full-year results this coming week, with HSBC on Tuesday and Lloyds on Thursday, intermingled with a trio of mining majors and some important UK macroeconomic data.

HSBC PLC’s (LON:HSBA) heavy Asian focus will make coronavirus, of Covid-19 as it is now officially known, a certain topic of interest at the results.

The bank, Europe’s biggest by assets and the second-largest presence on the FTSE 100, last year axed its chief executive John Flint and has pledged to continue swinging the axe at all levels, with a plan to cut one in twenty jobs.

After ditching Flint in August because “change is needed” to meet the “increasingly complex and challenging global environment in which the bank operates”, the HSBC warned in October’s third-quarter update that trading conditions have worsened.

Interim chief executive officer Noel Quinn said the lender no longer expected to reach its return on equity target of more than 11% in 2020 and that it was accelerating plans to “remodel” underperforming businesses, namely the non-ring-fenced bank in the UK, continental Europe and the US, and move investment into “higher growth and return opportunities”.

HSBC reassured investors that despite the additional restructuring charges, the dividend would be “sustained”.

Credit Suisse believes HSBC is at “a pivotal stage” as the Asia focused bank has “all the pieces in place” to make its new strategy a success.

The analysts reckon the bank’s management has not yet addressed all its structural inefficiencies, leaving a key area for future improvement that is expected to be reflected in an announced cost-saving target of around US$6bn by 2022, with the appointment of ex Hewlett Packard executive John Hinshaw as chief operations officer “significant” in addressing organisational complexity.

Credit Suisse also forecast US$9bn of share buybacks between 2020 and 2022 with a further US$10bn or so potentially.

Lloyds capital levels under scrutiny 

Lloyds Banking Group PLC (LON:LLOY) suspended its own buybacks in September and third-quarter profits crashed due to £1.8bn of extra provisions for PPI compensation.

Underlying profits in Q3 were also down as total income fell and net interest margin was squeezed, leading chief executive António Horta-Osório to trim the NIM outlook for the full year to 2.88% from previous guidance of circa 2.9% though operating costs are now expected to be less than £7.9bn, ahead of previous guidance.

The Spaniard, whose salary was later cut by around £228,000 amid a storm over excessive pay, warned that “continued economic uncertainty could further impact the outlook” but said Lloyds remained “well placed”.

Analysts at Credit Suisse said Lloyds “offers the purest, most liquid exposure to UK macro” but did not have the same capacity to make more “self-help” improvements that could produce positive capital surprises.

After Lloyds’ relatively poor performance in the 2019 Bank of England stress test, CS expects the bank to have to increase its CET1 capital target, which will further reduce its capacity for cash returns over and above the ordinary dividend.

Analyst Nicholas Hyett at Hargreaves Lansdown said: “Given the low expectations for 2019 we think investors will be paying more attention to management’s comments about the year ahead.

“Lloyds’ ‘Boris bounce’ was short-lived, suggesting investors aren’t exactly upbeat, and the shares are some way below where they were trading on the day before the election. That’s not been helped by the increasing likelihood of a cut in interest rates from the Bank of England this year, which is bad news for bank margins.”

Macro matters

Much more so for Lloyds than HSBC, but the performance of the UK economy is inextricably linked to the performance of the banks and in the coming week there are some major data releases due that will provide the first official post-election numbers.

After the resignation of Sajid Javid as Chancellor of the Exchequer and appointment of Rishi Sunak, Capital Economics said one of its main tasks for the coming week will be “watching for any news about the timing of the Budget or changes to the fiscal rules”.

The economists also said they expect the flurry of data releases “will further reduce expectations of an interest rate cut this year by showing that the labour market stayed healthy in December (due Tuesday), inflation rebounded in January (Wednesday), retail sales bounced back in January (Thursday) and the upturn in the activity PMIs continued in February (Friday)”.

Mining majors

The week will come with three sets of results from mining major, where investors will be reading the updates for comments on the impact of coronavirus.

China is the world’s largest buyer of commodities, consuming around half of the global amounts of copper, coal and steel, as well as significant quantities of lithium, nickel, iron ore, vanadium and zinc.

It seems than no miner is safe in this outlook, while number-crunchers struggle to count losses as the outbreak that public health experts say could still go either way.

Analysts at UBS see two possible paths for the mining stocks: downside if the pandemic is not contained in the first quarter, leading to commodities prices plunging further; on the other hand there would be a big uptick if China aggressively supports its economy and contains the virus.

So far, mining stocks have not moved much.

BHP Group PLC (LON:BHP), where an 9% drop since mid-January is the worst performance among the majors, already flagged well before its interims on Tuesday that Australian bushfires have hit coal production in its key producing areas.

But the Anglo-Australian giant kept production guidance unchanged over a “satisfactory” finish of the first half thanks to a pick-up in copper production.

That may not necessarily save the day, considering RBC Capital Markets expects coronavirus issues to drag copper prices down, and recently lowered its forecast to US$2.70 per lb from US$3.00/lb.

Glencore PLC’s (LON:GLEN) finals, also on Tuesday, follow a production update earlier this month where copper output dropped 6% due to the closure of its mine in the Democratic Republic of Congo, while coal, oil and cobalt were up.

The last of the miners will be Anglo American plc (LON:AAL) with its finals on Thursday.

The FTSE 100-listed group is fresh from an upgrade to ‘neutral’ from ‘sell’ by UBS although analysts still expect continued scepticism over the firm's takeover of Sirius Minerals PLC (LON:SXX).

The acquisition of the cash-strapped fertiliser miner comes amid polyhaylite commodity price uncertainty and with high capital expenditure, likely to lower free cash flow for seven years, according to the investment bank.

But, Sirius aside, the bank's analysts see potential in Anglo American’s exposure to platinum group metals, expected to be robust for the next years, while copper, diamonds and coal are expected to improve.

Investors will therefore want to see comments regarding the acquisition, its debt position and the short term outlook for the commodity sector.

Smith & Nephew investors nervously eye China effect

Smith & Nephew PLC (LON:SN.) delivered positive trading updates in 2019 thanks to strong growth in China, so investors will be keeping a close eye on whether the medical equipment specialist’s earnings could now be at risk amid the coronavirus outbreak.

Statements about recent trading and the outlook for 2020 accompanying Wednesday’s results will be crucial.

Shareholders may also be looking for any updates on the group’s acquisition of ear tubes specialists Tusker Medical, which it bought for an undisclosed sum in January.

For the figures themselves, which will cover a period before the epidemic, profit margins will be under the spotlight as they may have been held back by capital investment, acquisitions and foreign exchange headwinds.

Tough markets for InterContinental

For InterContinental Hotels Group PLC's (LON:IHG) finals on Tuesday, investors will expect news on the key US market in the last quarter, after some weakness across the industry last year.

The Holiday Inn and Crown Plaza owner has also been struggling in Chinese markets, now likely to have worsened amid the coronavirus outbreak.

Group revenue available per room (revpar) in the third quarter was down 0.8%, with a 36% plunge in Hong Kong expected to hit full-year financial results by US$5mln.

Like-for-like revpar was down 0.2% in the second quarter from the 0.3% growth in the first.

The outlook for this key metric “makes it difficult to be more positive on IHG”, according to analysts UBS, but the room pipeline and asset light operating model provide some upside.

Analysts at the Swiss investment bank forecast US$2.1bn revenue and US$986mln underlying earnings (EBITDA) for the past year.

Coronavirus also in focus for Hays

Interim results from recruitment firm Hays PLC (LON:HAS) on Thursday are unlikely to be greeted with much optimism after the group warned that a cocktail of the UK election, French strikes and Australian bushfires had hit fee income in the final quarter of 2019.

The picture is unlikely to improve going forward amid the ongoing coronavirus outbreak, which has the potential to hit the firm’s hiring activity in Asia as quarantine measures cause businesses to put the brake on expansion plans.

Hays warned in January that operating profit for the first half of 2020 is expected to be £100mln, down from £124.1mln, however, investors will be watching closely to see if the epidemic has weakened its forecasts further.

Intu the unknown

Four weeks ago Intu Properties PLC (LON:INTU) confirmed it is considering an emergency cash injection, said to be as much as £1bn, as part of new chief executive Matthew Roberts plan to “fix” the balance sheet.

But a week ahead of Wednesday’s final results, its share price was sent on another leg downwards after Hong Kong property group Link, which had been expected to make a major contribution, pulled out.

The owner of Manchester’s Trafford Centre and Lakeside in Essex said it remained “engaged with shareholders and potential new investors in relation to a proposed equity raise”.

With its shares having fallen more than 95% over the past five years, amid major structural changes to the retail market, the shopping centre owner has been selling properties to help reduce its £5bn debt pile.

Sales of two Spanish properties recently have generated £385mln net and Intu said in January that it was targeting the equity raise “alongside” full-year results.

Cyber BAE

BAE Systems PLC’s (LON:BA.) finals on Thursday are all about the order book and its cyber & intelligence business.

The supplier for defence, security and aerospace industries has been redoubling efforts in the US following President Trump’s boost to spending in the military department.

The FTSE 100 constituent finished the first half of the year with a record order backlog for the country which grew by US$1bn.

Meanwhile, the cyber & intelligence division could be “an important lever” for future growth, says Hargreaves Lansdown, albeit it is a small contributor to profits for now.

It serves commercial and government clients, offering help with everything from fraud prevention for financial institutions to helping nations defend against the most serious cyber-attacks.

The market hopes to see more contracts in the pipeline and no extra costs on top of the recent restructuring charge of £25mln.

Shares are up more than 13% since the start of 2020, suggesting investors are optimistic.

Pearson in flux

A profit warning in January pushed shares in Pearson PLC (LON:PSON) down to a ten-year low.

When it delivers its full-year results on Friday, there will be a first outing for new chief financial officer Sally Johnson, while chief executive John Fallon waits for a successor to be appointed before he can retire.

The education group has been engaged in a series of cost-cutting exercises to offset an ongoing decline in its US higher education market, although investors are unlikely to be holding their breath that a management team in flux will come up with a more sustainable strategy to drive profitability in the long-term before a new CEO arrives.

Analysts at UBS said they had previously thought that Pearson could sustain profit while the US courseware declines could be offset by growth in other businesses, and further costs could be removed.

“This thesis has not played out,” they admitted in a recent note, with the latest update revealing declines in US HE courseware were “accelerating”, growth in other businesses was only making “limited” contributions to underlying profit, and management did not indicate that any further costs have been removed.

Pearson said sales in 2019 would be flat and profit will be in line with guidance of £590mln, but warned that not only will sales remain flat next year but profits are expected to fall to between £500-£580mln.

Significant announcements expected for week ending 21 February:

Monday February 17:

US markets closed for President’s Day

Interims: Petra Diamonds Ltd (LON:PDL)

Tuesday February 18:

Finals: HSBC Holdings PLC (LON:HSBA), InterContinental Hotels Group PLC (LON:IHG), Glencore PLC (LON:GLEN), Spectris PLC (LON:SXS), Sunrise Resources PLC (LON:SRES), Renewables Infrastructure Group PLC (LON:TRIG)

Interims: BHP PLC (LON:BHP), Blancco Technology Group PLC (LON:BLTG), Pan African Resources plc (LON:PAF

Economic data: UK unemployment; UK average earnings; US Empire State manufacturing index

Wednesday February 19:

Finals: Hochschild Mining Plc (LON:HOC), Intu Properties PLC (LON:INTU), RPS Group PLC (LON:RPS)

Economic data: UK CPI, RIP, PPI HPI inflation; UK construction output; US housing starts; US PPI; US FOMC minutes

Thursday February 20:

Finals: Lloyds Banking Group PLC (LON:LLOY), BAE Systems PLC (LON:BA.), Smith & Nephew PLC (LON:SN.), Anglo American plc (LON:AAL), KAZ Minerals PLC (LON:KAZ), Moneysupermarket.com Group PLC (LON:MONY), Morgan Sindall PLC (LON:MGNS), Rathbone Bros. PLC (LON:RAT)

Interims: Hays PLC (LON:HAS), McBride PLC (LON:MCB)

FTSE 100 ex-dividends: Carnival PLC (LON:CCL), GlaxoSmithKline PLC (LON:GSK), Imperial Brands PLC (LON:IMB), Unilever PLC (LON:ULVR)

Economic data: UK retail sales; US weekly jobless claims; Philly Fed manufacturing index

Friday February 21:

Finals: Pearson PLC (LON:PSON)

Economic data: CBI industrial trends survey; US existing home sales

HANetf founder and co-CEO discusses shift to active management in ETF market

HANetf founder and co-CEO Hector McNeil tells Proactive's Stephen Gunnion about shifting trends in the exchange-traded fund (ETF) market in the United States, indicating a big move towards active management within ETFs. Despite the European market lagging behind the US by three to five years,...

11 hours, 55 minutes ago