Interest income gives UK banks momentum

The overwhelming theme in this first EPS upgrade momentum screen for 2023 is the apparent optimism for UK banks. NatWest Group (NWG), HSBC (HSBA) and Standard Chartered (STAN) all get full marks on our tests. Recent research output from S&P Global highlighted the boost to earnings for European and UK banks from rising interest rates. Rising rates enable banks to charge customers more for lending, while they are slower to increase the amount they pay in interest to depositors. This causes net interest income - a major component of banks’ profits to rise. Forecasters seem to be shrugging off the risk of asset write downs (i.e., loans to customers going bad) in any forthcoming recession, however. That said, in the case of HSBC and Standard Chartered, their significant Asia business will benefit from China’s reopening after zero-Covid policies, albeit there is still the caveat of geo-political risks that will continue to flare up periodically over Taiwan. 

On the mid-cap screen, automotive support services and parts distribution business Inchcape (INCH) has continued to make strides since its acquisition of Latin American focussed auto distributor and car dealer Derco last summer. It passes all of our tests and although any recession would be expected to hit car sales, core activities like Vehicle Lifecycle Services will be resilient. Continued improvements in global supply chains will help, but the ongoing global Semiconductor shortage continues to be a source of uncertainty for the global automotive industry. 

On Aim, the runaway leader at the top of the screen is Yu Group (Yu), which is an energy and utilities supplier that services the corporate sector. The share price has more than doubled in three months and after a huge jump in expectations for earnings growth this year, analysts predict the next fiscal year growth in eps will still be in the mid-teens per cent. Yet the shares are valued on the not eye-watering multiple of 12 times the predicted 12-month forward earnings.