Banks will this week lift the lid on their actions to prepare for an unprecedented mushrooming in bad debts as a result of the coronavirus crisis, while lenders and the government continue to come in for criticism over the lack of support for smaller firms.
Announcements on quarterly earnings from the FTSE 100's five big lenders will be spread out over the rest of week, with HSBC on Tuesday, Barclays and Standard Chartered on Wednesday, Lloyds on Thursday and RBS in its habitual Friday spot
Unlike other sectors that have rallied from the worst lows, bank shares 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.
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.
These monetary easing measures, which also included giving banks more leeway in their capital requirements and offering incentives for SME lending, and further measures from the Treasury are expected to enable the sector to keep lending through crisis.
But the share performance reflects market concerns over how loan losses could eat into balance sheets and, according to analysts at Barclays research team, are pricing in “a severe downturn”, as the combination of painful rate cuts and weak activity drive profits down around 20% year-on-year, even without bad loan provisions being included.
Looking out for losses and provisions
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.
One stress will be from bad loans, with Shore Capital's number crunchers predicting the sharp deterioration in the macroeconomic outlook will lead to “a significant increase in provisioning requirements”, noting that announcements from Wall Street's big banks this month showed impairment charges for the first quarter that were variously three to six times the level seen this time last year.
But Shore Cap calculated that, for example, Barclays’ bad debts would have to increase fourfold before their annual profits for 2020 might be wiped out, with Lloyds and RBS having a sevenfold buffer and HSBC eightfold.
Growth in risk-weighted assets is likely to heap serious pressure on CET1 capital ratios during this bank earnings season, analysts at UBS said, but they were optimistic about how the sector’s shares could bounce back.
HSBC, Barclays and StanChart
Giving the first indication on Tuesday of the sector's performance will be the biggest bank of the lot, HSBC PLC (LON:HSBA), where its global exposure will give a unique insight on the effects of the pandemic, with a significant business in China and across Asia in particular focus, along with operations in both the UK and US.
When it announced the cancellation of its dividends, Europe's largest bank flagged that credit performance had held up well but the pandemic was having an effect on some revenues and valuation adjustments as well as lifting expected credit losses.
For the past quarter, income is expected to be little changed from the preceding three months, but UBS is 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".
On Tuesday, Barclays PLC (LON:BARC) is forecast to remain profitable despite taking £1bn of impairments, with the investment bank providing a key buffer despite UBS anticipating this arm could see £600mln of mark-to-market losses in the quarter.
Berenberg's research team recently highlighted Barclays shares as looking “cheap” for a potential post-coronavirus rebound, despite medium-term concerns about political and regulatory pressures.
At Standard Chartered PLC (LON:STAN), which will provide a different perspective through its focus on emerging markets, boss Bill Winters was already under pressuring coming into the pandemic, having last year fallen out with investors over his pay and with February's results revealing that the American has failed in his primary turnaround target.
StanChart is forecast by UBS to deliver only slight falls in revenues and pre-provision profits, with ongoing loan losses of US$416mln.
Lloyds and RBS
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.
CBILS faulty?
Lloyds and RBS offer contrasting angles to the role banks have been playing as a key tool of government policy, as they are the two leading lenders under the Treasury's Coronavirus Business Interruption Loan Scheme (CBILS) for smaller businesses.
However, while Lloyds is normally the market leader, it has been accused of not pulling its weight in the early stages of the Covid-19 crisis.
Figures released last Thursday showed that 16,624 loans totalling £2.8bn had been made in the first month since the CBILS launch.
Lloyds, which normally has a market share of small business lending of 19% but has approved 2,382 CBILS loans, 14% of the total, worth £335mln, or 14%.
Natwest, part of taxpayer-owned RBS, has approved more than 40% of the total loans by volume and value, compared to its normal 20% market shares.
Barclays is in third place, having made 2,971 loans, worth £586mln.