U.K. banks’ upcoming fourth-quarter earnings are expected to reflect robust financial performance and attractive shareholder returns. Investors are likely to focus on commentary on the outlook for 2024 in terms of net interest margin trajectory as well as restructuring actions to save on costs. Here is what you need to know, based on views shared by analysts in recent research notes, with a focus on NatWest, Barclays, HSBC Holdings, Lloyds and Standard Chartered, the top five U.K. banks.
WHAT TO WATCH:
–The lenders’ fourth-quarter print is expected to reflect the impact of subdued lending activity in retail and corporate banking in the three-month period to Dec. 31 while providing clues on what to expect for the year ahead as saving behavior normalizes. “Deposit mixes should also stabilize as offered rates fall further,” UBS said, noting that adverse changes were at their cyclical worst in the third quarter. “We expect front-end mortgage spreads to stabilize as rate cuts come through. We expect lower product rates to improve sentiment, put a floor under house prices, generate improved news headlines, higher gross lending and, ultimately, more home-moving,” the brokerage said.
–Net interest income for the period will be closely watched as the metric “will likely come under pressure given lower interest rates and while activity levels should improve in a lower rate environment, the Q423 base looks set to be lower than previous expectations,” analysts at Keefe, Bruyette & Woods wrote. Attention will be on each bank’s net interest margin base and trajectory for 2024. “We look to the U.K. banks to not only provide one year forward guidance, as they usually would at this stage, but to also talk about the dynamic over the course of the year,” Citi analysts wrote, noting they expect net interest margin to fall in the first half of the year before normalizing thereafter.
–NII for domestic banks will be more exposed to the expected rate cuts from the Bank of England, while that of international banks HSBC and Standard Chartered is expected to reflect resilience given their ability to flex costs as net interest margin declines with the approach of U.S. Fed cuts, the analysts add. “We believe the near-term outlook for NIMs is likely to be one of further gentle erosion rather than a collapse,” Shore Capital said. The companies have structural hedges–the balance sheet exercise that reduces banks’ sensitivity to interest-rate moves–in place which are expected to provide considerable support during 2024.
–Investors will also be considering the banks’ ability to sustain potentially record pretax profits on the back of higher interest rates. “The market does not seem to believe that current lofty levels of profitability can be maintained, because the Big Five FTSE 100 banks are going to generate record annual pre-tax profits between them in 2023,” AJ Bell investment director Russ Mould wrote. “Analysts do seem to think that 2023 may be as good as it gets, because aggregate pre-tax profits are seen coming in flat-to-down in 2024 and 2025.”
–As the benefits from higher interest rates are expected to taper off with upcoming rate cuts, analysts will turn to the lenders’ gearing to non-interest income as a source of revenue. Banks with corporate, investment and wealth management such as Barclays, HSBC and Standard Chartered are set to be better positioned to capture positive momentum from fee income in these areas after a likely disappointing end of 2023. Investors will seek out signs of recovery from a challenging fourth quarter which is expected to reflect an environment in which “volatility was not high enough to stimulate significant trading activity but still a little too high to drive improved capital markets activity,” according to Shore Capital.
–Cost management will also be in focus as pressures on the banks’ topline increases, along with a possibility of restructuring costs from certain players such as Barclays, which already flagged a fourth-quarter structural cost-action charge. Still-high wage inflation has been increasing at a slower rate since September, which should reduce pressure on banks’ cost bases given staff costs are usually one of their biggest components.
–In terms of cash returns to shareholders, the five banks are expected to pay out a dividend and announce share buyback programs at the results. “U.K. banks continue to favor share buybacks as a way of returning excess capital (c.55% of total), which is often cited as a key reason to buy the sector,” KBW analysts wrote.
SCHEDULE:
–NatWest Group: Friday Feb. 16
–Barclays: Tuesday Feb. 20
–HSBC Holdings: Wednesday Feb. 21
–Lloyds Banking Group: Thursday Feb. 22
–Standard Chartered: Friday Feb. 23
Write to Elena Vardon at [email protected]
