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Tighter regulations, depressed economic activity, record low interest rates and a slew of unprecedented settlements with regulators stymied the performance of the global banking sector in the years following 2008’s global financial crisis. A decade later and interest rates are finally starting to rise, reigniting investor interest in the banks, both in the US and in Europe. It has been a busy week for earnings in the UK banking sector with report cards from HSBC, Lloyds, Barclays and RBS.
How did the UK banks fare?
HSBC kicked off the reporting season, posting its first period of revenue growth in six years as, now former Chief Executive, Stuart Gulliver, delivered his final set of quarterly results before passing the baton to John Flint.
Shares in Lloyds jumped after the bank announced a share buyback programme of up to £1 billion and increased its full-year dividend by 20%. Investors shrugged off its miss on statutory pre-tax profit, which still hit a record high.
Barclays’ shares soared, despite disappointing profit and revenue. The market cheered its common equity tier 1 (CET1) ratio, measuring the strength of its capital position, which hit 13.3%, beating its own target of 13%. The bank also promised to restore its dividend this year, having cut the payout two years ago.
Finally, the market failed to get excited by RBS’s first annual profit in a decade, with shares slumping nearly 5% on the morning the results were released. Adjusted profit came in below expectations and the bank disappointed by failing to give an update on its settlement with the US Department of Justice around legacy mis-selling of mortgage-backed securities.
Stock picking among UK banks
Gildas Surry, portfolio manager at Axiom Alternative Investments, says equity investors had high expectations from the UK banks ahead of their fourth quarter (Q4) results, as rising rates spurs on net interest income. Surry said the week started badly when HSBC suspended its share buyback program. Overall, he is constructive on Lloyds, Barclays and RBS.
Political risk for the Italian banks
Italian voters prepare to cast their ballots in the upcoming election on 4 March. Former Prime Minister Silvio Berlusconi’s Forza Italia will face off against the populist Five Star Movement and the centre-left Democratic Party, led by Matteo Renzi. Opinion polls suggest a hung parliament, which is creating political and economic uncertainty.
Among the financials, Surry says the smaller Italian banks could be at risk around the election. He says Credito Valtellinese is one bank to watch out for, as well as Banco BPM, the product of the merger between Banco Popolare and Banca Poplare di Milano (BPM). However, he concludes that political risk has receded for the sector as a whole.
Axiom’s top European banking sector picks
As a credit investor, Surry says he likes Lloyds and BNP Paribas, along with Rabobank’s insurance partner, Achmea, in the Netherlands.