The four major UK banks have been a benchmark for UK 100 performance over the years, but also an important component of UK economic growth.

After a trying start in 2018, we are past the half-time mark, which means that mere days remain before we find out how the UK financial sector fared in the second quarter and first half of the year.

Release of Q2 earnings results for Lloyds Banking, Barclays, Royal Bank of Scotland (RBS) and HSBC will mark a review of the financial sector’s health and provide useful guidance for the rest of the year to help investors make informed trading decisions.

This report will go over the key economic trends that drive the sector, highlight the Banks’ share price performance after the previous quarterly reports, go over technical indicators and charts for each of the major Banks, as well as highlight analysts’ perspectives for what lies ahead.

Positioning for success

Quarterly results from the Big Four UK Index Banks are a recurring event and seasoned investors pay close attention to each new earnings report.

Here at Accendo Markets, we believe in empowering our clients by doing much of the legwork and analysis for them.

That includes saving the dates when earnings are released, scoping the trading conditions, as well as analysing the changes that occurred in the trading environment since the last report.

Which leaves investors primed and ready on the crucial day to take advantage of the tradable opportunities presented by UK bank shares.

Here are the key dates to save in the diary:

• Lloyds: 1 August
• Barclays: 2 August
• RBS: 3 August
• HSBC: 6 August

Banking sector drivers

Major banks are finely attuned to the shifts in economic conditions and regulatory policy, which makes it another area of interest to experienced investors.

Several important factors are driving the banking sector in 2018. Chief among them is the ongoing Brexit negotiations between Westminster and Brussels.

Lack clarity on the final status of UK-EU relations, especially regarding the free movement of capital (one of EU’s so-called “four freedoms”) is creating uncertainty for the sector in terms of regulations (licensing, tax base) and future investment priorities (locations, personnel).

Another significant driver for the banking sector in 2018 is the continuing softening in UK economic growth, which is forcing UK consumers to tighten their belts and spend less on credit, mortgages and investments. Annual GDP growth slowed to a 6-year low figure of 1.2% in the first quarter of 2018 due to weaker household consumption and fixed investment.

Consumer credit and mortgage applications (important revenue sources for banks) still remained healthy in the second quarter. Although both metrics are off 2018 highs in their latest reported figures, the number of mortgages approved for house purchases in the UK increased to over 64K in May, beating market expectations. (Source: Bloomberg)

Outlook for the rest of 2018 appears to be rosier, however, with multiple policymakers from the Bank of England (BoE), including the Bank’s Governor Mark Carney, expecting improved growth in the second half of the year.

Improvement in economic conditions is seen as a major benchmark for potential tightening of UK’s monetary policy. Economists are widely expecting (with 77% probability) the BoE’s Monetary Policy Committee (MPC) to raise its base interest rate during the MPC’s upcoming 2 August meeting. (Source: Bloomberg, 20 July 2018)

This makes 2 August a particularly important date for Bank sector investors, as it falls right in the middle of the corporate reporting season (same day as Barclays reports Q2 results), while also seeing a potential hike of UK’s key interest rates.

A tighter monetary policy would typically mean improved profitability figures for private banks, as higher interest rates are translated into improved Net Interest Margins (NIMs), the difference between the interest the bank receives from lending money and the interest it pays on deposits.

Due to their size, large UK and US retail banks are enjoying the benefits of a “low deposits beta”, where higher interest rates lead to increased revenues from customer borrowing, but don’t increase as much for customer deposits.

Yields on savings deposits are expected to turn higher later in 2018, according to analysts at Bernstein, but the process is expected to start with the more competitive small- and medium-sized banks, while the Big Four Banks should continue seeing higher NIMs. (Source: FT, 8 April 2018)

Across the Atlantic

American banks are taking the lead reporting quarterly results this summer, as Citigroup and JPMorgan started the ball rolling on 13 July, while Bank of America, Goldman Sachs and Morgan Stanley joined the fray on 16-18 July.

JPMorgan beat broker estimates on investment banking revenue and FICC (Fixed Income, Currencies & Commodities) sales, with overall revenue +6% ($27.7B), while EPS was +26% ($2.29).

Citi’s revenue was +2% (but missing consensus forecasts), while EPS beat broker estimates, coming at $1.63 (vs. $1.57 consensus). FICC revenue was likewise disappointing, falling 6% YoY to $3.08B (missing $3.16B estimate).

Bank of America net income rose 33% in the second quarter, with the bank beating expectations on both revenue and EPS.

Goldman Sachs was the big winner among big US banks, delivering the highest Q2 revenue in 9 years and beating consensus forecasts on revenues (7.5% beat), EPS (28% beat) and FICC sales (1.8% beat).

Morgan Stanley is the latest big US bank reporting quarterly results, with sales and trading business +18%. The bank beat profit estimates on the back of higher fixed income (13% estimate beat) and equities trading business. EPS of $1.30 beat consensus expectations by a significant 20%.

Most of the US banks benefited from a boost to profit margins from corporate tax cuts which were signed into law by President Trump at the end of 2017.

Higher Fed interest rates helped deliver better interest revenues, but costs of deposits and short-term borrowing were also rising, eating into some of the banks’ margins.

Continue reading the report as we shift focus to UK banks and examine their performance following first quarter results.

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