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Banks: a hit-and-miss start to 2017

The UK-listed banks improved profitability, but uncertainty remains for a sector plagued by one-off costs
May 4, 2017

UK banks' first-quarter results provided reassurance and disappointment for investors who have bought into the recent recovery in banking stocks.

HSBC (HSBA) is demonstrating the joy that a universal banking model - providing retail, commerical and investment banking services in multiple geographies - can bring. Its first quarter adjusted pre-tax profit came in at $5.9bn (£4.6bn), up 12 per cent on the same period last year, driven by good performances in its investment bank and higher sales and assets under management in Asia, its focus for growth. Reductions in costs and risk-weighted assets are on track.

Royal Bank of Scotland's (RBS) personal and business banking business outperformed market expectations, posting an 8 per cent increase in net interest income to £1.1bn. Importantly this was driven by growth in lending and meant operating profits were up 3 per cent year on year. This followed news that the state-backed bank had settled with a further 40 per cent of the remaining claims against it over its 2008 rights issue. That means it has concluded with 87 per cent of these claims by value. Restructuring costs were as expected and provisions taken for liabilities and credit impairments were down - a good start considering management's aim to make this year its final for taking significant one-off costs.

Crucially the bank moved back into an attributable profit of £400m, compared with losses of £4.4bn and £1bn in the previous year and quarter, respectively. However, US litigation and the ongoing difficulties of offloading Williams & Glyn could yet throw a spanner in the bank's ongoing recovery.

For Barclays' (BARC) shareholders the news was more disappointing. The investment banking business that outperformed market expectations during 2016 had a less solid start to this year. Banking income increased almost a fifth thanks to more debt and equity underwriting and corporate advisory work. But exiting energy-related commodities and a weaker performance from investing in US rates pushed down markets income by 4 per cent to £1.4bn. Shares in the bank shed 5 per cent on the day of the news.

But Barclays' international business still increased pre-tax profits by almost a third, thanks in part to currency benefits. The UK business was also stable, growing its net interest margin by seven basis points to 3.69 per cent due to a reduction in deposit pricing feeding through.

Lloyds' (LLOY) net interest income nudged upwards for the same reason. Crucially, the bank's progressive dividend prospects also looked assured. Management said it expected capital generation to be at the upper end of its 170-200 basis point range this year.