UK bank earnings look ahead

This week sees a trio of earnings from the UK’s banking sector, coming hot on the heels of an excellent set of numbers from their US counterparts.

It will be hard for UK banks to live up to the example set by the US. While American banks have their travails, they are nothing compared to the issue of Brexit that hangs over the UK financial sector. Fresh commentary has this week emerged as to how many jobs might leave London in coming years and although Wells Fargo is embroiled in a huge scandal, it still pales in comparison to the disaster-zone that is RBS.

Up this week are Lloyds, Barclays and then RBS, on Wednesday, Thursday and Friday respectively.

Lloyds provides plenty of interest, given it is such a powerful player within the UK mortgage market. The government’s decision to cancel a retail offering of its holding in Lloyds does not really affect the group’s overall prospects. Rather the biggest risk is that UK house buyer activity begins to slow. At present, there are few signs this is the case, but rolling ten-year returns for UK houses are turning lower, once again, having enjoyed a brief bounce earlier this year.

A UK recession that hits home buying is the real risk for Lloyds. However, at 8.5 times earnings – well below the five-year average of around 10.1 – plus a dividend yield of 4.3%, the risks associated with the shares might be offset by the relative cheapness of the firm at current levels.

Barclays continues to suffer from regulatory fines along with ongoing high costs (including the disposal of its once-promising Africa arm), and general disillusionment with the investment banking model. Low interest rates and lower demand for lending have hit the banking sector hard, while Barclays’ trading division is seeing reduced activity.

Barclays’ shares have gone from being cheap in the immediate aftermath of Brexit, at around 6.6 times forward earnings (versus a five-year average of 8.2) to 11.8 times as of the end of October. Having stabilised above 140p, perhaps a base has been formed, but it will need good numbers to maintain the relatively expensive valuation.

Finally, there is RBS. The value of the government’s stake is about to be reduced once again, and hopes of a sale of its shares in the bank have been firmly dispelled. The fact the shares failed to participate in the broad-based post-Brexit rebound underlines how dismal the bank’s outlook is. Perhaps it’s one for a ‘file and forget’ investment, with a tiny part of a portfolio allocated to RBS on the understanding it is probably a write-off and any gain is going to be a pleasant surprise. 

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