UK Banks Reporting This Week

Third quarter earnings season is well underway in the UK, Europe and the US, and this week sees three of Britain’s largest financial institutions all reporting how they have fared.

Lloyds Banking Group kicks off reporting on Wednesday, followed by Barclays on Thursday before the Royal Bank of Scotland concludes the week’s earnings on Friday.

These earnings releases from these UK banks will provide first indication of the Brexit impact on the most important sector for the UK economy and as a result will have major implications on future economic outlook. Having enjoyed some of the most impressive bounces from the post-referendum lows of late June and early July, will their earnings over the same period reflect the performance of their share price?

In order to prepare you for the release of these all-important earnings, this report will provide an overview of the performance of the banks’ US counterparts, a roundup of analyst expectations for the three earnings releases and a review of the banks’ share price performance over the three month period.

What are Lloyds, Barclays and RBS set to report in the days to come? Will results disappoint or please? Will legal costs and provision for PPI mis-selling still be a feature?

During earnings season, companies that report are normally subject to larger than expected swings in share price as investors and institutions alike digest the range of information provided. Following a positive set of results, it is not unheard of for companies to rally over 5% whilst disappointing figures could provide similar downward price movements.

However, sometimes results may have a surprising impact on share price. A seemingly positive set of results on the surface could provoke a fall in prices on the day. Similarly, a set of results that may appear to be disappointing could provide a share price rally!

In order to help you make sense of the potentially confusing earnings releases, our traders are on hand to provide insight into the nature of the reports from before the opening of markets until the close of play.

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What happened across the pond?

Third quarter earnings for US financials began with a triple release on October 14. Internationally focused JP Morgan and Citigroup both maintained a profit to beat EPS expectations by $0.19 and $0.08 respectively, despite a fall in overall earnings of $0.5bn each, while the former expanded revenue by $1.9bn from a year previous thanks to a huge $1.4bn (32.5%) increase in trading revenue.

Despite being embroiled in a costly scandal over the mis-selling of accounts that saw its CEO & Chairman John Stumpf depart, Wells Fargo managed to post a minor EPS beat of $0.02, increasing revenue by $0.4bn.

Bank of America Merrill Lynch beat both EPS and revenue expectations by $0.07 and $0.6bn respectively, buoyed by an impressive quarter in its trading operations.

Goldman Sachs once again beat expectations across the board, increasing profits by 50% and beating earnings per share by over a dollar at $4.88.

Morgan Stanley rounded off the first batch of earnings releases, posting $1.6bn profit and a $1.1bn expansion of revenue to post an EPS value of $0.81, beating analyst expectations by $0.18 thanks to a strong performance from its sales and trading divisions.

Other notable performances came from Bank of New York Mellon, beating EPS expectations by $0.09, and US Bancorp, who beat expectations by $0.08 thanks to mortgage banking growth.

Will it be more of the same for the UK?

Will these stellar performances be repeated by the UK banks? Previews from Dow Jones Newswires, compiling analyst predictions from major financial institutions predict varying performances from the three UK powerhouses, with all three not expected to reach the heights of their US counterparts.

However, with the US banks beating on the upside by a surprisingly large amount coupled with UK macro data so far showing a negligible impact of Brexit, can Britain’s banks also beat consensus?

Lloyds lending in focus

Lloyds is predicted to be the best performer of the trifecta, with analysts polled by Reuters expecting an increase in profit of £310m from a year ago to post a $1bn third quarter headline figure. Revenue is also predicted to increase from £4.2bn a year ago to £4.4bn for the third quarter of this year.

As the holder of the largest mortgage book out of the three UK financials reporting, a keen eye will be kept on the performance of Lloyds’ lending operations post-Brexit. So far macro data suggests that there has been no significant downturn in demand for homes in the UK, however any significant deviance from expectations may show that the impact of Brexit has been either under or overstated.

RBS banking on disposals

RBS on the other hand is expected to show a loss once more, as the part state-owned bank seemingly continues to lag behind its peers. Reuters’ analyst poll predicts that the bank will post a loss of £231m over the third quarter, an almost £1.2bn swing from profits of £952m reported for the same quarter a year ago.

As the government once again downgrades the value of its stake in RBS, a failure to offload its Williams & Glyn branches to Santander for the second time as part of its obligations to meet EU regulations for state-aid has once again hampered the outlook of the bank. Furthermore, will the looming fine from the US Department of Justice for the mis-selling of mortgage back securities provide yet more bad news for RBS?

Barclays trading boost?

The performance of Barclays, the most internationally focused of the three UK banks, will almost certainly be centred on activity from its trading operations. The Reuters poll of analysts provides expectations for the bank to post a profit of £795m compared with profits of £1.4bn a year previous, down 43% by £605m. The analyst poll also predicts that revenue (net of mis-sold insurance claims) will total £4.8bn, a fall of £1.3bn (21%) from Q3 2015.

FX effects from the current weakness of Pound Sterling may help to provide translational gains for the banks trading operations, offsetting the negative impact of an overall decline in activity, although once more regulatory fines and costly disposal of foreign trading arms could weigh on earnings.

The following pages contain analyst forecasts for the three UK banks in the coming 21 months, alongside technical analysis of their share price performance since June 1^st.