UK banks preview – Lloyds, Barclays, RBS

A look at UK bank earnings next week. 

Royal Bank of Scotland
Source: Bloomberg

Lloyds (first-half results 1 August)

As usual with Lloyds, the size of payment protection insurance (PPI) provision, its market share of the mortgage market and the size of its structural hedge will be the key elements to watch for in these earnings. Brexit concerns will dominate too, but the strong start to the year and an interesting yield of 5.5% combined with a price to earnings (PE) ratio of 8.3, comfortably below the five-year average of 9.7, suggests the market is pricing in sufficient difficulties over the next couple of years. By comparison, the rest of the sector trades at 14.8 times forward earnings.

Lloyds’ shares are in an ascending triangle as they look to break above 64p and challenge the downtrend line from the 2018 high. A break above 64p opens the way to 65p, while a close below 62p would suggest a further decline towards 60p.

Barclays (first-half results 2 August)

A clue to Barclays' performance may be found in the results from JPMorgan and Deutsche Bank. Here, dollar strength supported both the banks’ capital and their profits. Some weakness may continue to be seen in the sales and trading division. Further penalties may yet cloud the outlook, but earnings are expected to grow steadily over the next two years. As with Lloyds, Barclays trades below its five-year forward earnings ratio, at 8.8 versus 9.5, while the dividend yield of 4.2% is covered over three times by cash generation.

Barclays’ shares have held above 185p, but have yet to break the downward move seen since April. This would require a push above 194p. A close above here targets 206p and higher. A close below 185p would open the way to 176p.

RBS (first-half results 3 August)

The settlement with US authorities in May removed one cloud from the shares, but the apparent positive development regarding an eventual end to government ownership has been nullified by the general gloom hanging over the UK economy. Further UK economic difficulties will hit performance, and potentially delay a return to paying dividends. At 9.1 times forward earnings the shares are well below the five-year average of 12.5, but the difficulties surrounding Royal Bank of Scotland (RBS) would suggest this valuation is justified.

The shares have bounced off the 240p level, and further gains will target 252p and then 260p. We’ll see 231p and then 221p come into view if the shares drop below 240p.

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