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Banks enter bargain territory

Macroeconomic concerns have depressed the shares of the major UK-listed lenders, but that belies progress on capital levels and returns
November 1, 2018

Investors may find a bargain among the major UK-listed lenders – the shares are trading at near 12-month lows, despite improvements in returns on equity, impairments, and capital levels during the third quarter. However, sentiment towards the ‘big five’ banking groups has been marred by political uncertainty and fears of slowing economic growth, mirroring a global sell-off in blue-chip stocks in October.

Royal Bank of Scotland (RBS) may have recommenced dividend payments for the first time in more than a decade earlier this year, but the lender’s cautious attitude towards the potential fallout from a disorganised Brexit was punished by investors on the day of its earnings release. The state-backed group took a £100m impairment against customers defaulting on their loan repayments, “reflecting the more uncertain economic outlook”.

Berenberg analyst Peter Richardson reckons RBS has been penalised for its prudence. “On one hand, investors are crippled by fears surrounding the possible effect of Brexit on UK banks,” he says, “On the other hand, the short-term costs of strategies to mitigate these risks are being punished, not rewarded.”

However, investors can take succour from another boost in RBS’s common equity tier one ratio – up 60 basis points to 16.7 per cent during the quarter – thanks to the continued reduction in risk-weighted assets and the one-off recovery of £272m in insurance indemnities.

Fellow domestic retail-banking-focused peer Lloyds Banking (LLOY) also received an underwhelming response to a robust set of third-quarter figures. Unlike most UK lenders, the group managed to hold its net interest margin steady despite the intense competition within the mortgage market and reaffirmed already improved capital generation guidance of around 200 basis points for the full year. However, the shares were blunted further after the release of these figures, when the High Court ruled that the lender must equalise pension payments for men and women – the lender reckons the bill will run up to £150m

In fact, the Asia-focused banking groups – HSBC (HSBA) and Standard Chartered (STAN) were the only two of the ‘big five’ banking groups to impress investors with their latest earnings figures. Both are being judged on their ability to expand across Asia while keeping a grip on costs. New HSBC chief executive John Flint delivered on both – to an extent. Adjusted operating expenses were 2 per cent higher, but that was down on the first-half’s 8 per cent increase, while net interest income was up 8 per cent to $7.7bn (£6bn).

For Standard Chartered – which has struggled to deliver the boost in returns on equity chief executive Bill Winters promised when he took the top job more than three years ago – it was perhaps the hope of better things to come that seemed to inspire a rally in the shares. Credit impairments declined more than half, boosting adjusted pre-tax profits almost a third to $1.1bn. But while the return on equity improved 150 basis points to 6.6 per cent, that’s still shy of Mr Winters’ 8 per cent medium-term target. However, management said it would it would unveil a plan alongside its full-year results in February next year to “become a simpler, faster and a more sustainably profitable bank”.