Against slowing global economic growth forecasts marked by the recent inversion in the US yield curve, expectations for the big banks’ first-quarter results weren’t sky high. But collectively they still managed to disappoint investors, who sold down their holdings on three of the five earnings announcements.
However, while each lender’s report highlighted its own set of challenges, it was notable that the two banks whose quarterly results received a positive market reaction – Standard Chartered (STAN) and then HSBC (HSBA) – have far greater exposure to Asia and so-called emerging economies.
For the UK-focused Lloyds Banking Group (LLOY), Barclays (BARC) and Royal Bank of Scotland (RBS), shaking dour investor sentiment remains an intractable task. Even in a week when the Bank of England flagged a possible pick-up in domestic inflation and growth over the next two years, the domestic political impasse that hangs over the City looks as though it will dictate market optimism (or the lack thereof) for the foreseeable quarters.
Vital signs
| TIDM | Company name | Market cap (£m) | Price (p) | 1-yr change (%) | Price/tangible NAV | Net interest margin (%) | Fwd P/E (x) | Fwd Yield (%) | IC Rating |
| HSBA | HSBC | 134,752 | 684 | -5% | 1.26 | 1.59 | 12 | 5.9 | Buy |
| LLOY | Lloyds Banking Group | 44,479 | 62.6 | -3% | 1.17 | 2.91 | 8 | 5.1 | Buy |
| RBS | The Royal Bank of Scotland | 28,503 | 236 | -12% | 0.82 | 1.89 | 9 | 3.0 | Hold |
| BARC | Barclays | 28,356 | 164 | -19% | 0.62 | 3.18 | 7 | 4.9 | Buy |
| STAN | Standard Chartered | 23,402 | 712 | -4% | 0.79 | 1.56 | 11 | 2.3 | Hold |
| Sources: company reports, S&P Capital IQ, Investors Chronicle, data accurate as of 3 May | |||||||||
A buyback solution to growth issues?
This said, if there was one consistent theme to these quarterly numbers, it was the challenge to growth in any jurisdiction.
Figures for Standard Chartered were a case in point. Though focus was drawn to talk of improved customer sentiment – management’s resolution of “all material legacy conduct and control issues” and the sharp drop in credit impairments, which led to a 5 per cent rise in pre-tax profits to $1.24bn (£0.95bn) – income generation was soft. First-quarter income across its Asian, European and Americas divisions fell year on year, with a small rise in Africa and the Middle East and a favourable hedging movement largely responsible for halting the decline in operating income at 2 per cent.
Indirectly acknowledging the growth challenge, and a market that values his bank’s shares a fifth below their tangible net asset value (NAV), chief executive Bill Winters launched a $1bn buyback programme. Following a 30 basis point first-quarter decline in the common equity tier-one (CET1) ratio – a measure of bank financial resilience – the announcement was a surprise. But while the buybacks are likely to wipe a further 35 basis points off the CET1 ratio before the half-year, shareholders applauded the bank’s first repurchases in two decades, pushing the shares up 5 per cent.
Naturally, HSBC is keen to join the party. After posting its highest pre-tax profit in 14 quarters, investors have been told to expect a decision on 2019 share buybacks “at the half-year”. However, any positive surprises on this front will require the largest UK-headquartered lender by assets to juggle a massive technological investment programme with a drive to reduce costs. In the three months to March, revenue growth outstripped operating expense growth – the so-called 'adjusted jaws' ratio – by 6 per cent. That sets a high bar for the rest of 2019, especially as the banks acknowledged cost-cutting is needed to “meet risks to revenue growth”.
Could Lloyds be about to expand its buyback programme? Ahead of its results, the bank’s board determined that its own CET1 ratio could decline by 50 basis points to 13.5 per cent, inclusive of a 1 per cent management buffer, following the Prudential Regulation Authority’s revision of the systemic risk buffer applied to Lloyds’ ring-fenced bank.
Several analysts immediately interpreted this as a prelude to an additional £1bn buyback, a view that would be supported by a steady net interest margins of 2.91 per cent and a cost-to-income ratio moving in the right direction. However, the quarter also saw substantial unforeseen charges, while impairments also rose 40 per cent on the prior period, compared with a 2 per cent climb in net income. With big exposures to the UK credit card and mortgage markets, any new-found bullishness about the capital position should be weighed against threats to the loan book, and the risks posed by a sudden jolt to the economy.
Still no political relief
Indeed, the B-word hovered over these collective results like a bad smell. By the end of the quarter, the UK was supposed to have left the European Union, and yet another quarter has rolled on with the brows of the sector’s top brass still furrowed.
Lloyds chief executive António Horta-Osório flagged the persistently negative impact of Brexit uncertainty on the economy, while HSBC chief financial officer Ewen Stevenson gave an interview in which he said the impasse had made him more cautious on the UK than any other jurisdiction.
Barclays issued a similar note of caution, highlighting its increased liquidity pool and falling loan-to-deposit ratios as defensive measures against a worst-case scenario, while trumpeting its “conservative” exposure to the UK, operational base in Ireland and resilience to macroeconomic pressures.
However, it was RBS that sounded most concerned. The bank offered up its results “against a highly uncertain and competitive backdrop”, which chief executive Ross McEwan said had caused a pause in some investment decisions. And in a more fraught tone than Lloyds, RBS described “unprecedented levels of competitive pressures in the UK mortgage market”, as average loan-to-value rates remain at historic lows. Investors have now been warned that income growth will be “more challenging in the near term”.
Bowing out
This then, was an inauspicious moment for Mr McEwan to announce his departure from the state-controlled group, after five-and-a-half years in what RBS chairman Howard Davies described as “one of the toughest jobs in banking”. First-quarter results resemble an uneven foundation to build upon. While first-quarter pre-tax profits of £1bn came in 11 per cent ahead of consensus forecasts, interest-earning assets fell and the net interest margin again declined to 1.89 per cent, following a reclassification of funding costs and an accounting change in interest for suspended accounts. The metric – a yardstick for the profitability of a bank’s lending activities – is now down 24 basis points in two years (see chart).
The sector could also soon be bidding adieu to Edward Bramson, the activist shareholder who failed in his bid to secure a seat on Barclays’ board at the bank’s annual general meeting on 2 May. However, several major shareholders reportedly agreed with the logic of Mr Bramson’s push to break up the investment banking arm, suggesting incoming chairman Nigel Higgins will soon have a decision to make on chief executive Jes Staley’s commitment to the division. As with HSBC, Barclays’ investment banking remains a perennial drag on the group’s return on equity, a feature underlined by an 11 per cent drop in the division’s income to £2.5bn in the first quarter, as a result of “reduced client activity, lower volatility and a smaller banking fee pool across the industry”.
