First-quarter earnings at the big UK-focused banks have been boosted by further credit quality progress - but for some that has been more than undone by tough investment banking conditions.
Lloyds (LLOY) and RBS (RBS) witnessed especially robust improvements in loan quality as economic conditions continued to recover. Lloyds' impairment charge tumbled 57 per cent, while RBS's fell 65 per cent. RBS was also helped by a 14 per cent profit boost at its investment banking-focused markets unit - which, according to Investec analyst Ian Gordon, represented the bank's "main positive surprise". That, however, was driven by lower costs as the division's restructuring continues.
First-quarter profit at Lloyds grew 22 per cent to £1.8bn, while RBS's pre-tax profit rose to £1.64bn from £826m in 2013's first quarter. But Mr Gordon advised against getting "carried away" with RBS's apparent recovery - its results included just £100m of a planned £2bn restructuring charge. Improving earnings have helped capital adequacy, though, and RBS's Basel III tier-one capital ratio improved to 9.4 per cent, although it remains the least well capitalised of its peers. Barclays' (BARC) ratio is a marginally better 9.6 per cent, but HSBC's (HSBA) and Lloyds' both reached 10.7 per cent.
Adjusted pre-tax profit slipped 5 per cent to £1.69bn at Barclays, while HSBC's adjusted profit dropped 20 per cent to $6.79bn (£4bn). That's primarily down to investment banking weakness, significantly reflecting a drop in the trading of bonds, currencies and commodities amidst US tapering-related interest rate uncertainty. For Barclays, in particular, costs are also an issue. Its costs beat consensus estimates by 7 per cent but, with the revenue miss being so large compared with the cost beat, analysts at Deutsche Bank think its existing £17.5bn underlying cost target for 2014 could face scrutiny. Still, both lenders benefited from improving credit quality - Barclays' impairment charge fell 22 per cent while HSBC's dropped 32 per cent.
