What did we learn from UK bank results?

The major UK financial institutions have reported their half-year numbers, providing investors with an insight into their progress (or otherwise).

Canary Wharf, London
Source: Bloomberg

It has been a mixed bag, to say the least, although to be scrupulously fair that observation could have applied to bank earnings for almost any period since the financial crisis. RBS perhaps continues to take the biscuit as the worst performer, while previous strong performer HSBC is still mired in a strategic turnaround that seems to be going as well as Tesco’s attempt to regain its dominant position in the UK supermarket sector.

Barclays, the first bank to report, saw excellent performance in its investment banking activities, with return on tangible equity rising to 14.3%. Sadly other parts of the business were not as robust, and while the shares posted a decent bounce, and have continued to recover their post-Brexit losses, it looks as if we should expect weaker performance from the bank as a whole when full-year results come around at the beginning of 2017.

Next up was Lloyds, a bank where profits doubled but jobs are still being cut. Total income fell 1% to £8.9 billion, and with the Bank of England (BoE) having cut rates once already, and potentially more on the way, Lloyds’ prime position in the UK mortgage market could be about to become more of a hindrance than a help. In particular, we should wonder whether the bank will still meet its margin targets in a world of looser UK monetary policy, with all that implies for dividend payments as well. In addition, it now looks like the government’s sale of its Lloyds stake is dead in the water for the time being, with the share price still 23% down on its pre-Brexit high.

HSBC has also little to cheer investors, and while the abandonment of the ‘progressive’ dividend policy at least signals a laudable common sense approach to cash conservation, it does signal that the bank’s management is perhaps considering cutting the payout. Second-quarter profits were down 45%, and while it plans to buy back $2.5 billion of its shares, there is little to provide much in the way of optimism.

Lastly we have RBS, that constant reminder of the financial crisis. Losses skyrocketed once again, as litigation costs and restructuring efforts once again dominated the ‘exceptional’ column (although these aren’t exactly ‘one-offs’ anymore). Even here the improvement in mortgages and commercial lending will likely be hit by the BoE’s easing moves, while a fresh delay to the Williams & Glyn IPO signals more restructuring costs are on the way.

In short, it is probably too early to expect much in the way of good news from the UK-focussed banks. The effects of Brexit are only just beginning to filter through, and the full reckoning will take months. The BoE’s decision to ease policy may cushion the blow, but it will also hurt interest margins at the banks. The sector faces further tough times; even with dividends reinvested, investors would have lost around 4% each year since September 2009. There would seem to be much better places to put cash to work, as the hunt for yield goes on. 

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