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UK banks – from bad to slightly better?

UK banks have reported yet another weak set of earnings as they continue to feel the impact of the financial crisis. But there are clear winners and losers within this stressed sector.

Aerial view of Canary Wharf
Source: Bloomberg

Barclays
Overall the bank’s first-quarter numbers were a shade worse than expected. The 34% drop in the share price in the twelve months preceding the announcement meant a bounce was practically guaranteed. But it failed to last.

In one sense, the bank is doing well. The core business, which covers the high street arm and Barclaycard, saw profits rise 18% to £1.6 billion. However, much of this good performance has been achieved by taking all the underperforming bits and quietly putting them in the ‘non-core’ end of things.

Thus Barclays is a decent UK retail bank, but one with plenty of baggage, not least its investment banking arm, and one with a return on equity of a measly 3.8%.

Royal Bank of Scotland Group
This banking group is still perhaps the iconic relic of the financial crisis. Each time its name appears the public is reminded of how the globe-spanning ambitions of former Chief Executive Fred Goodwin and his coterie brought the financial system to near-collapse.

The bank is still a long way from full health, and it seems equally far from getting back to paying dividends. The news that it will have to delay the spin-off of its Williams & Glyn arm does not help matters. Restructuring charges continue to swallow up funds, with £1 billion forecast for this year and the same amount expected next year.

Yet, like Barclays, the core bit keeps going, despite the brickbats. Net loans continue to rise, and it has a commanding share of both the UK mortgage and current account markets. Trading at around 60% of book value, the shares can start to look attractive if you think the UK economy is not about to turn southwards.

Lloyds Banking Group
Bond buybacks meant Lloyds’ figures were not as impressive as hoped, but it does look like the British government might be looking to restart the sale of its remaining stake in due course.

The bank still expects to pay out £16 billion in PPI claims, a reminder that this tedious element is still a permanent fixture of UK banking results. At least the net interest margin is improving, now at 2.74%, while it has a healthy capital buffer. But, a lot of the improvement in its loan book has come from higher house prices.

These show little sign of turning around, but if they do, Lloyds could start to look a little overpriced. Trading at a hefty premium to book value, the bank could become vulnerable to a rerating.

HSBC Holdings
Miserly expectations for HSBC’s results were duly beaten, but the staid stock price performance of recent months doesn’t really boost the bank’s appeal.

Continued cost cutting and small improvements in revenue merit some attention, but with earnings looking weaker as time goes on the question is whether the progressive dividend policy is likely to take a hit. Present forecasts on full-year earnings mean it is not certain whether the payout will be fully covered.

It has a very strong capital ratio, at 12-13%, and some brave souls have suggested that capital can now be redirected to dividends, but with Asia still looking weak the bank is not out of the woods yet.

Standard Chartered
This bank received an enthusiastic bounce in its shares following its latest figures, with cheerleaders pointing to an improvement in loan losses and a fall in operating expenses as a reason for believing the worst is over.

Restructuring charges however will still play a part in coming years, with $123 million in the first quarter and around a billion dollars’ worth for the full year. Ultimately, Standard Chartered is, even more than HSBC, a way of taking a view on any Asian recovery. If investors think markets there have turned a corner, then the recovery in the share price may have further to go.

Conclusion
The UK banking sector provides a decent element of choice for investors. The home teams of RBS and Lloyds perhaps look attractive, given the reasonable state of the UK economy, even if PPI payments refuse to go away. HSBC and Standard Chartered are no longer the secure bets they once were, and perhaps still have too many uncertainties to be anything but adventurous plays.

Ultimately, any investor looking at the sector has to be prepared to wade through endless figures and ratios. So long as the global economy avoids another crisis and central banks keep policy accommodative, the outlook seems fairly calm, but investors should tread carefully in a sector still overshadowed by the financial crisis. 

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