UK banks should be announcing encouraging fourth-quarter numbers next week based on current trends, according to analysts at Barclays.
“Ongoing NIM (net interest margin) upside from rates, benign impairments and stronger capital/returns,” should mean guidance points to above-consensus earnings and sector-leading distributions, said the bank.
Calls for some of this to be recovered through more taxation such as the windfall levies imposed on the oil companies are likely to intensify and with a Budget coming up, the chancellor might be tempted though so far has resisted.
Lloyds, which was recently upgraded by the bank, is the stand-out according to Barclays, due to a perceived ability to cope better with the Bank of England carrying out ‘quantitative tightening’ following its rate hiking cycle and the escalating competition for customer deposits.
Lloyds has “greater reliance on retail savings”, while NatWest “may be more exposed given its weighting towards flightier commercial current accounts”.
Fourth quarter results from Lloyds should be ahead of consensus forecasts, it adds, at £2.1bn on an underlying basis making £7.55bn for the full year, with a £2bn share buyback also predicted.
“We also expect positive updates to medium-term guidance including expectations of ROTE [return on equity] building through 15-16+% from 2023 and upgraded capital generation guidance of more than 2%, supported by a lower pension contribution, to point to significantly above consensus distributions [dividends, buybacks] potential.“
NatWest was downgraded by Barclays but is in favour at Goldman Sachs which slapped on a ‘buy’ rating ahead of fourth-quarter results (due on 17 February), where it expects the high street lender to show an increase in net interest income (NII) to £3bn, up from £2.6bn in the third quarter.
This would take the annualised rate to £12bn, or £4.4bn more than the £7.6bn achieved in 2021 and give a big boost to the bottom line.
“The sharp step-up is driven by policy rates with the step-up being more back-end loaded into the second half and particularly the fourth quarter,” Goldman noted.
“We see the NII uplift driving a step change in profitability, lifting return on total equity by 11 percentage points towards around 18-20% by 23/24 which we find has not been reflected in valuation” the bank added.
Consensus forecasts are for fourth-quarter profits at NatWest of £1.36bn (underlying) and £4.95bn for the full year.
HSBC should be supported by ongoing support from UK/US rate hikes and low deposit betas (people switching accounts), tempered by weaker margins in Hong Kong, says Barclays.
“China’s reopening is happening faster, albeit potentially also in a more disorderly fashion than anticipated; nonetheless this should be supportive for HK activity levels into 2023, most notably Wealth Management, and may help to limit downside risks from property in China.”
Barclays see potential distributions worth 35% of market cap by 2025, with fourth quarter underlying profits of US$6.5bn and US$23.6bn for the full year.
Finally, Barclays has a big investment bank and while this has been a plus in recent years this time it might not be so straightforward.
Jobs cuts and downbeat outlooks were the tone of the recent statements from US bulge bracket rivals such as Goldmans following a slump in flotations, capital raisings and M&A activity.
Analysts point out that Barclays plays in the same pool while also having exposure to a strained UK mortgage market.
Brokers forecast fourth-quarter profits of £1.52bn ex litigation costs while for the full year £7.2bn is expected compared to £8.4bn in 2021.
As with all the banks, the bad debt line this time will be closely watched, especially with the cost of living pressures.
Barclays has a £161bn mortgage loan book, a £9bn credit card book in the UK and a £24bn credit card book in the US, notes wealth platform AJ Bell.
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