The UK’s three largest clearing banks – Lloyds, Barclays and NatWest – report first-quarter results this week, with analysts bullish about the sector as they see low valuations and the prospect of more bumper capital returns in the next few years.
Peel Hunt was the latest to join the positive chorus, with analysts arguing that “valuations are low, profitability is already established at levels that should justify higher valuations, and that many of the factors that are currently depressing valuations (the weak UK economy, poor performance of the UK equity market…) are likely to abate in the medium term”.
A total of nearly £30 billion of capital returns for the trio is forecast over the coming three years, equal to c.30% of their current combined market caps.
Let’s look at what to expect this week.
Wednesday: Lloyds
Lloyds Banking Group PLC (LSE:LLOY) is the least favoured by Peel Hunt (a ‘hold’ recommendation and target price of 55p versus the last close at around 51p) as analysts see less near-term share price upside due to its starting point premium valuation.
Motor finance provisions are one of the big question marks hanging over these quarterlies, with Lloyds having so far announced a £450 million provision for the potential impact of the Financial Conduct Authority’s review of historical motor finance commissions.
Full FCA’s findings are due by 24 September 2024 and UBS, which recently tipped the black horse bank with a ‘buy’ rating and 58p target, said it does not expect any more motor finance provisions with this set of numbers.
The City analyst consensus forecast for underlying profit is £1.73 billion, down from £2.22 billion a year earlier but close to the £1.75 billion seen in the fourth quarter of last year. Statutory PBT of £1.66 billion is expected, down from £2.26 billion YoY and £1.78 QoQ.
Net interest margin (NIM) is expected to have narrowed further to 2.93% from 2.98% in Q4 and 3.22% in Q1 of last year, in line with guidance for at least 2.90% for the year, with sequential growth later in the year.
A CET1 capital ratio of 13.9% is predicted, down from 13.7% three months earlier and 14.1% a year earlier.
“We think if UK domestic banks can produce noticeable income growth in 2025 they will stand out vs Eurozone peers in faster pass through markets in particular,” UBS said.
Thursday: Barclays
Next comes Barclays PLC (LSE:BARC), which is tipped as a ‘buy’ by Peel Hunt and UBS with targets at 245p and 240p.
The Peel team like Barclays as “banks’ P/TNAVs are correlated with ROTE,” in other words, banks with higher profitability generally have better stock valuations, with Barclays’ return on capital “should increase in coming years as more capital is allocated to higher-returning activities”.
Consensus ROTE is 11.7%, up from 8.8% last year. pre-impairment profit is £2.73 billion with a £539 million impairment, and a statutory PBT of £2.2 billion. CET1 is seen rising to 13.6$ from 13.3%.
Barclays has guided to £3 billion in dividends and buybacks this year, the same as last year and around 11% of its market cap.
But UBS thinks this quarter could see a “smaller 2Q-announced buyback” and more of its capital returns loaded in the back end of the year due to higher seasonal deployment of capital in the investment bank and the recent US card acquisition.
Barclays’ investment bank will be in focus too, as US rivals such as Citi and JPMorgan reported sales and trading down 8% and 5% on last year and advisory up 32% and 27%.
Friday: NatWest
NatWest Group PLC (LSE:NWG) occupies its familiar Friday spot and other bank analysts also having a positive Friday feeling about the lender.
Those at Barclays recently forecast that NatWest will beat first-quarter earnings guidance and post an upward revision to its full-year guidance due to markets repricing rate expectations higher in recent weeks due to stickier inflationary indicators (although markets are still unsure about a possible summer rate cut).
Peel Hunt is also bullish, doling out another ‘buy’ and target price of 330p, as analysts see scope for the group to recover lost market share in core banking products like mortgages and credit cards back to pre-2008 levels, now that internal restructuring is complete.
The end of the UK government holding should also be positive for the shares over the next two years.
Consensus is for profit from continuing operations of £1.26 billion, versus £0.91 billion in Q4, mainly helped by lower tax charges plus a little less impairments. NIM is expected to be little changed from the 1.99% at the end of last year, likewise CET1 of 13.4%.
Capital returns will also be in focus, with lower impairments possible one of the keys to this, said UBS.
