FTSE 350 Review: Banks look to interest rates for margin growth

Barclays in a pickle

Various managements at Barclays (BARC) have fought tooth and nail to maintain the bank as a joint retail and investment banking operation. That effort has been impressive on its own terms, but the impression remains that while the investment side can deliver the profits when market conditions allow, it is also undeniably the source of many major hiccups over the years. The latest £450mn profits hit from poor administration of its structured finance unit, which has forced the delay of the share buyback programme, is but one example. It is likely that management will spend a good proportion of this year dealing with internal and regulatory inquiries into the affair.

While clearly infuriating for shareholders, the company’s missteps can’t take away from the fact that Barclays' presence in the fee-rich US investment banking market is the strongest of any of its European rivals. While that will offer some counter-cyclical security against potentially weaker domestic banking, any sign of lower activity in capital markets, plus indifferent M&A markets, would compound the domestic weakness.

NatWest and Lloyds look increasingly boring

Investor morale at NatWest (NWG) was greatly cheered by news that the government’s ownership stake in the bank had fallen below the psychologically crucial 50 per cent threshold. Despite being largely symbolic – a 49 per cent ownership still means the government can call the shots – it is a tangible sign that the long restructuring phase, which involved ditching the RBS brand name and shrinking the balance sheet by three-quarters, is finally ending.

The question then becomes in what direction will NatWest head? The answer seems to be towards 'boring'. After ditching the old RBS’s pretensions to global multi-asset growth, NatWest seems, by contrast, ready to embrace the home banking market with its compensating sensitivity to UK-based interest rates now base rates are on the rise.

Lloyds Banking Group (LLOY) is in a broadly similar position this year, with its UK economy/interest rate exposure giving it a measure of security when compared with the high exposure of US banks to odd things such as commodity derivatives. The key points this year will be whether the bank makes any progress on cutting its costs. The cost ratio has stayed stubbornly high at around 70 per cent, despite efforts to bring it under control. Fundamentally, unless Lloyds intends to abandon its 'last man standing' strategy to keep branches open in many locations, costs will struggle to fall. The move into the housing sector to act effectively as a landlord is also replete with risks.

By contrast, HSBC (HSBA) seems to have lost all interest in the UK market – another big round of recently announced branch closures suggests there will soon be nothing much left to distinguish it from its online subsidiary First Direct. HSBC has long signalled its intention to focus primarily on the Asian banking market, so it surely cannot be long before the old Midland Bank brand is dusted off and revived as a means of hiving off the UK. As the UK’s other large market-making bank alongside Barclays, HSBC is also perennially capable of generating unwelcome news, particularly when it comes to regulatory and legal issues. Hopefully, however, most of its skeletons are now out of the closet.