UK banks have faced a tough half-year, with valuations slumping and challenges like deposit movement and mortgage pressure weighing on performance. Fourth quarter results are coming over the next couple of weeks for the major UK banks and the tides look to be turning. The outlook for 2024 may end up being more important than the results themselves.
UK banks continue to suffer from a post-Brexit valuation slump. While it looks like net interest income has peaked, there are enough tailwinds on the horizon to make the sector worth attention at current valuations.
NatWest: good barometer for the sector?
NatWest [LON:NWG] came out on Friday with a big profit beat as Paul Thwaite was confirmed as permanent CEO. Impairment charges were better than expected as customers continued to show remarkable resilience in the face of higher inflation and interest rates. Absent any major shock to unemployment, low default rates are expected to continue over 2024.
Retail customers continue to go in search of better rates from longer-term savings accounts. But crucially for NatWest, the pace of deposit migration was significantly slower in the fourth quarter than in the prior. Perhaps a sign that the peak in migration has come and gone – this would be good news for net interest margins.
Investors will be a little put off by NatWest giving no net interest margin guidance, especially considering income for 2024 is guided slightly lower than the consensus was looking for.
NatWest’s scandal-filled end to 2023 means its valuation is even more attractive, especially considering it should be one of the biggest benefactors of its structural hedge rolling on to higher yields – an ongoing income tailwind. Retail clients will be closely watching how things develop, given they may get a chance to snap up shares at a discounted price later this year if the government goes ahead with its plans to sell its stake. For existing investors, the ordeal will be a small blip and NatWest’s valuation should continue to trade based on its fundamentals.
Barclays
The biggest question mark overhanging Barclays [LON:BARC] right now is what the size and scale of its announced restructuring will look like. There will be a focus on costs reduction rather than material business changes, especially in the UK which sits well above peers on a cost to income basis. The real question for investors is whether restructuring charges taken over the fourth quarter will impact the expected £890m buyback – of course nothing is guaranteed.
Aside from traditional lending, Barclays has a giant global investment banking arm. “To say it’s a been a lag of late is arguably an understatement, and we’re expecting another weak quarter,” said Matt Britzman, an equity analyst with Hargreaves Lansdown. “But with rates forecast to come down over 2024, the outlook for the IPO and M&A market could give investors something to cling to.”
Britzman said that Barclays is also a good barometer for the health of both UK and US consumers with a multinational credit card portfolio alongside more traditional lending, default levels will be closely watched.
HSBC
HSBC [LON:HSBA] has been one of the better performers over the last year, benefiting from increased exposure to US and Hong Kong rates. The sale of its Canadian business is expected to complete over the first quarter. Management will hopefully shed some more specifics on where the freed-up capital will be allocated – shareholders should expect a mix of shareholder returns, and investment into higher growth areas.
“Operationally, there are some concerns investors would like to get reassurance on,” Britzman said. “HSBC’s exposure to the wavering Chinese real estate sector brings added risk that further impairment charges will be needed – keep an eye on commentary here. The cost outlook is also key, with the only real change to 2024 guidance back at third-quarter results being an uptick in expected costs.”
Lloyds Bankign Group
Lloyds Banking Group [LON:LLOY] faired pretty well back at third quarter results, the only major UK bank to see underlying profit before tax improve from the prior quarter. As a traditional lender with operations geared toward interest income, net interest margin (NIM) is key. The 3.08% posted last quarter was lower than markets were expecting, but management remained confident in delivering NIM of more than 3.1% for the year – analysts are looking for 3.01% in the fourth quarter.
With consumers under pressure, loan default commentary and the value of impairments Lloyds takes will be watched closely. Consensus is for a £126mn impairment charge, but some analysts see scope to unwind previous charges which would be a boost to profit. Investors will also be keen to hear any update from management on what impact they expect from the FCA’s investigation in past motor financing, some estimates suggest a charge of up to £1.8bn.
Standard Chartered
Standard Chartered [LON:STAN] gave markets a bit of a shock back at third-quarter results by taking a massive $700m write-down on its stake in a Chinese bank. The Chinese domestic banking environment is tricky and remains an ongoing risk, as does exposure to commercial real estate in the region. “Both areas have been trimmed in recent years, but we’ll be watching for impairment levels and any plans to manage risks closely,” said Britzman at Hargreaves Lansdown, “Consensus is for around $300mn in impairment charges over the fourth quarter.”
Current guidance for Standard Chartered points toward margin expansion over 2024, and consensus expects net interest income to rise around 6%. These trends are broadly at odds with the wider sector and rate expectations, so investors will be particularly interested to hear commentary on how growth will be achieved.
