The final week of April will see updates from some of the market’s big hitters including banks, oil supermajors, pharmaceutical giants, supermarkets and high street retailers.
Banks are going to be the main theme on the business agenda in the coming week, with not only investors but also regulators and the Treasury keeping an eye on rising loan losses during the coronavirus crisis.
The quarterly earnings reports are spaced out over the week, with HSBC on Tuesday, Barclays and Standard Chartered on Wednesday, Lloyds on Thursday and RBS in its traditional Friday spot.
Unlike other sectors that have rallied from the worst lows, banks have been some of the worst blue chip performers since the start of the year, with the FTSE bank index down more than 40%, compared to the near-23% decline for the FTSE 100 and a 30% loss for the FTSE 250.
One of the causes was that the last we heard from most of the sector was on the first of April when all five of the UK’s top banks suspended their dividend payments and staff bonuses after a request from the Bank of England to preserve cash during the crisis, removing the main investment case for holding banking shares in a low interest rate environment.
The share performance also reflects market concerns over how loan losses could eat into balance sheets and also, says analyst Russ Mould at AJ Bell, “implies that investors have real doubts as to whether banks’ return on equity will ever consistently exceeds their cost of capital”.
Andrew Bailey, the new BoE governor, recently said the central bank was watching closely to make sure banks do not repeat the mistakes they made in the financial crisis and was keen to avoid another credit crunch for small firms.
However, he said banks now have much stronger balance sheets than they did in the run-up to the financial crisis, but that stress tests have not included the effects of a pandemic such as with Covid-19.
Recent bank share prices are pricing in “a severe downturn”, said analysts at Barclays, who expect the combination of painful rate cuts and weak activity to drive pre-provision profits down around 20% year-on-year.
“Lending under a government guarantee is a potential source of revenues/returns. But we think banks could be loss-making if probability of default approaches c10% (without security)”, the Barclays analysts said.
Number crunchers at UBS said this bank earnings season could see “material” pressure on CET1 capital ratios from growth in risk-weighted assets, but they were optimistic about how the sector’s shares could bounce back.
Company-specific factors
Looking specifically at each bank, a check-list of questions was offered for investors by analyst Nicholas Hyett at Hargreaves Lansdown:
· Has the increase in demand for funding from companies led to a significant increase in lending in certain areas?
· Have we already seen a spike in bad loans and what provisions are banks making for future defaults?
· What’s happened to net interest margins (which measures the difference between the interest the bank charges on loans and what it pays for funding) after the BoE rate cut earlier in the year?
Giving the first indication on Tuesday of the sector's performance will be the biggest of the lot, HSBC PLC (LON:HSBA), where its exposure to China and the rest of Asia will be in particular focus, while its business also straddles the UK and US.
Alongside the cancellation of dividends, the bank flagged that credit performance had held up well but the pandemic was having an effect on some revenues and valuation adjustments and lifting expected credit losses, with UBS forecasting US$1bn of charges.
Mould noted that, with results from Wall Street banks this earnings season showing growth in both loans and deposits but with deposits growing much faster, "it will be interesting to see if HSBC’s clients also made a dash for cash".
Barclays PLC (LON:BARC) is forecast to remain profitable despite taking £1bn of impairments by UBS, where analysts are also anticipating its investment bank will see £600mln of mark-to-market losses in the first quarter.
For Standard Chartered PLC (LON:STAN), UBS forecasts revenues and pre-provision profits to be down only slightly, with ongoing loan losses of US$416mln
At Lloyds Banking Group PLC (LON:LLOY) the performance of its wealth management joint venture with Schroders will be worth noting, said Hyett.
“We’ll also be paying particular attention to lending trends in the higher risk credit cards, unsecured lending and car finance divisions which have become increasingly important in recent years.”
UBS forecasts Lloyds will take around £1bn of impairments, assuming “fairly material one-off charges relating to life insurance volatility and similar mark-to-market issues below the line” in the quarter.
Finishing off the week, Royal Bank of Scotland Group PLC (LON:RBS) is seen taking less than £700mln of impairments, with pre-provision profits more than halved to just below £1bn from the £2.2bn seen in the last quarter of 2019.
Oilers report amid volatile market
It’s probably impossible to overstate just how challenging the oil market has been (and continues to be), so undoubtedly outlook and commentary around crude pricing will be among the focus points when Royal Dutch Shell Plc (LON:RDSB) release first quarter results on Thursday.
The same goes for BP PLC (LON:BP. which has its update on Tuesday, with the pair having both lost more than a third of their value so far this year.
Whether or not theses ‘supermajors’ will retain their dividends will naturally be the key concern for most shareholders.
Shell typically pays the largest dividend in the FTSE 100, around US$15.9bn, and, so far close to US$30bn of blue-chip payouts have so far been cancelled.
Stockbroker AJ Bell, in a preview, noted that Shell’s average oil sales price was US$56.60 a barrel in the fourth quarter and that the latest collapse this week (down briefly into negative pricing) came three weeks after the Q1 reporting period.
“Just how far have profits in the upstream business fallen and has Shell decided to take any further asset impairment charges after the $2.3 billion hit taken on US onshore oil assets, Australian gas operations and the downstream business in the US and Singapore in Q4 2019,”
“Shell has shown its determination to defend its $1.88-per-share dividend,” AJ Bell said.
The stockbroker highlighted consensus forecast for a slight dividend cut, to US$1.74 per share, but, also that there’s a huge range in estimates from as high as US$1.91 and as low as US$0.31.
Trading updates about a month ago suggested that both BP and Shell could afford to keep up their dividend payments in the short term, but, that was before crude prices nosedived further.
Pharmaceutical giants joint frontline of coronavirus vaccine effort
The mid-point of the week will bring first quarter updates from two of the UK’s pharmaceutical heavyweights, GlaxoSmithKline PLC (LON:GSK) and AstraZeneca PLC (LON:AZN).
AZ has been one of the bright spots during the pandemic, with its shares having hit an all-time high on 21 April as it combines its nature as a defensive stock with its place at the forefront of efforts to find a vaccine for the coronavirus through its partnership with other pharmaceuticals groups.
However, investors are likely to focus on these efforts as a cost burden rather than potential new earnings, and with profits being a priority in these times positive news from the company’s Chinese expansion and its new drug sales is likely to be eyed more closely.
Analysts at UBS are estimating the firm will report a quarterly core operating profit of US$1.6bn with revenues of US$5.9bn.
For GSK, its shares are also likely to hold up well as a defensive investment, however, shareholders are likely to be more concerned about any disruption to the company’s operations at its research and manufacturing sites around the world.
The company is also joining AstraZeneca in the frontline for a coronavirus vaccine, although investors are likely to know that such a project may not be profitable.
Beyond coronavirus, attention is likely to be drawn to sales of the company’s new drugs as well as any updates from its research & development portfolio.
UBS is forecasting earnings per share of around 33p for the quarter.
Sainsbury’s checks its receipts
Final results for J Sainsbury PLC (LON:SBRY) on Thursday will provide some clarity on how the supermarket’s sales have fared during March’s spate of shopping sprees as consumers stocked up ahead of the government lockdown.
Across the sector, Britain’s supermarkets have struggled to keep up with rocketing demand puts unprecedented strain on their capacity and supply chains, although this had the beneficial effect of soaring sales.
However, results from Tesco this month showed that the upswing in demand can also increase costs, so investors will be looking to see if Sainsbury’s has faced similar issues.
Other areas in focus will be the group’s financial position and the outlook for its dividend as the lockdown stretches on.
St James’s Place fund levels eyed
The first-quarter figures for wealth management firm St James’s Place PLC (LON:STJ) on Thursday will give investors another chance to scrutinise the firm’s funds under management (FUM), which in its full-year figures in February showed a 13% drop in net inflows despite a FUm increase of 22% to £117bn.
Also under the microscope will be any news on growth in advisor numbers and the company’s client retention rate, although as with other firms the dividend outlook may be at the front of many shareholder’s minds.
Next to update on restarted operations
Next PLC (LON:NXT) is publishing a trading announcement on Wednesday where investors expect weekly sales performance.
Shops of the fashion retailer have been closed since the beginning of the UK lockdown in March, while online operations were shuttered until 14 April.
The FTSE 100-listed firm kept a limit on orders to ensure safety measures at its warehouses, so analysts are wondering what these limits may be and whether it will expand from childrenswear and home to include core womenswear and menswear.
Peel Hunt said that selling a seasonal product through the lockdown will be key to reducing the overall stock overhang.
“The sector will still have a high discount backdrop, however, making share of voice and performance difficult, but we expect Next to come through this, with the group’s online platform likely to put it in a stronger market position coming into the autumn and the year ahead,” analysts commented.
Is Reckitt Benckiser still enjoying higher demand for hygiene products?
Reckitt Benckiser Group Plc (LON:RB.) is updating the market on its sales on Thursday.
Shares in the consumer goods firm have been lifted by expectations of higher demand for health and hygiene products during the coronavirus pandemic.
Other than that, the conglomerate is going through structural change, so investors will want to hear on developments on this front.
Analysts at the Share Centre pointed out that the market did not react particularly well to previous restructuring plans.
Macro matters
There are some big macroeconomic events to watch out for in the coming week, with central bank meetings in the US and Europe, together with gross domestic product data from the US and bank lending data in the UK and Europe.
“US first-quarter GDP will be the headline figure to watch out [on Wednesday] and the real question is how badly has the economy been effected,” said ING, also flagging a “massive week” for post-corona data in Europe.
The bank’s economists look for the US economy to have contracted 6% on an annualised basis in the first quarter with much worse to come in the second, with a 40% annualised fall in output eyed between March and June “even if other US states follow the lead of Georgia, Tennessee, Florida and South Carolina and start re-opening their economies in the next two to four weeks”.
Jobless claims numbers could improve after three big weeks, through some states starting to re-open, but a weakness in manufacturing and business services is spreading nationally.
“The horror show that is the jobs market means that consumer confidence will fall sharply while business activity as reported by the ISM manufacturing survey will also plunge given what we have already seen from regional indicators,” ING added.
The Federal Reserve’s meeting also on Wednesday “is likely to be met with much less fanfare than usual”, says RBC Capital Markets, as the central bank has been operating in “real-time” during the crisis.
Eurozone GDP will be announced on Thursday, with consensus expecting a 3.2% fall on the quarter or 2.7% on the year, as this period only just beginning to show the effects of the virus outbreak, with Italy the first of the area’s countries to go into lockdown on March 12 followed by Spain on March 15, France on March 17 and Germany on March 22.
The brunt of the impact on GDP is likely to be felt in the second quarter, with RBC’s forecast for GDP to fall by 5.1% in Q1 and a massive 25.7% in Q2.
Significant announcements expected for week ending 1 May:
Monday 27 April:
Trading announcements: Mind Gym PLC (LON:MIND)
Finals: SIG PLC (LON:SHI), CentralNic Group PLC (LON:CNIC), Blackbird PLC (LON:BIRD), Lok’N Store Group PLC (LON:LOK), SpaceandPeople PLC (LON:SAL)
Tuesday 28 April:
Trading announcements: BP PLC (LON:BP.), HSBC Holdings PLC (LON:HSBA), Travis Perkins PLC (LON:TPK), Weir Group PLC (LON:WEIR), Shoe Zone PLC (LON:SHOE), Bank Pekao SA (LON:BPKD)
Finals: Non-Standard Finance PLC (LON:NSF), Keystone Law Group PLC (LON:KEYS), STM Group Plc (LON:STM)
Wednesday 29 April:
Fed interest rate decision
Trading announcements: Barclays PLC (LON:BARC), Standard Chartered PLC (LON:STAN), AstraZeneca PLC (LON:AZN), GlaxoSmithKline PLC (LON:GSK), Next PLC (LON:NXT), WPP PLC (LON:WPP), Elementis plc (LON:ELM), Fresnillo Plc (LON:FRES), Synthomer PLC (LON:SYNT)
Finals: N Brown Group PLC (LON:BWNG), Allied Minds PLC (LON:ALM), Bank of Cyprus Holdings PLC (LON:BOCH)
Interims: Proactis Holdings PLC (LON:PHD), C4X Discovery Holdings PLC (LON:C4XD)
Economic data: US GDP
Thursday 30 April:
Trading announcements: Royal Dutch Shell PLC (LON:RDSB), Lloyds Banking Group PLC (LON:LLOY), Reckitt Benckiser Group PLC (LON:RB.), Schroders PLC (LON:SDR), St James’s Place PLC (LON:STJ), G4S PLC (LON:GFS), Glencore PLC (LON:GLEN), Evraz PLC (LON:EVR), Hikma Pharmaceuticals PLC (LON:HIK), ConvaTec Group PLC (LON:CTEC), James Fisher & Sons PLC (LON:FSJ), Howden Joinery Group PLC (LON:HWDN), Kingspan Group PLC (LON:KGP), Lancashire Holdings Ltd (LON:LRE), Network International Holdings PLC (LON:NETW), Vivo Energy PLC (LON:VVO), Kaz Minerals PLC (LON:KAZ),
Finals: J Sainsbury PLC (LON:SBRY), Symphony Environmental Technologies PLC (LON:SYM), Westminster Group PLC (LON:WSG), Ocean outdoor Limited (LON:OOUT), Morses Club PLC (LON:MCL)
Interims: Up Global Sourcing Holdings PLC (LON:UPGS), Apax Global Alpha Limited (LON:APAX)
FTSE 100 ex-dividends to knock 0.69 points off the index: London Stock Exchange Group PLC (LON:LSE)
Economic data: US jobless claims, US Chicago PMI, UK car production, UK house prices
Friday 1 May:
Trading announcements: Royal Bank of Scotland Group PLC (LON:RBS)
Economic data: UK manufacturing PMI, US manufacturing PMI