It’s that time again – new year, mid-Jan – and we’re preparing for US banks’ quarterly financial health check. The sector is important, in terms of the message about US, and thus global, growth. Also the read-across for Euro/UK sector counterparts, in terms of sentiment and expectations about results closer to home in the weeks to come.

On the docket for next week: Citigroup (Mon), JP Morgan, Wells Fargo (Tues), Bank of America, Goldman Sachs (Weds) and, lastly, Morgan Stanley (Thurs). Combined market value? $1 trillion!

A busy week from the outset, especially alongside Tuesday’s meaningful Brexit vote by UK MPs. The latter has less to do with US banks, but could well sway the share prices of their UK brethren.

As it stands, the US banks are down an average of 27% from 2018 highs. On the flip-side, helped by a late December bounce persisting into January, the shares are up an average of 13% from 2018 lows.

This is remarkably similar to the UK Banks (Barclays, Lloyds, RBS, HSBC and Standard Chartered; combined market value: £244 billion), down 25% from 2018 highs, up 12.3% from the lows. This suggests the sector trades similarly on both sides of the Atlantic, hence the importance of stateside results.

What we will be looking out for: did recent stock market volatility help investment banks’ trading operations (equities, bonds, commodities)? Have higher US interest rates meant better net interest margins for the retail side (banks charge more to borrowers than they pay savers)? Any new/persistent legal issues?

What of the outlook now that the Fed’s (US central bank) interest rate hiking cycle is closer to the top? US GDP growth (and other data like jobs) remains strong, but Europe and China are slowing. After so much stimulus, US economic growth could be set to plateau, perhaps even fall.

Some of these issues do not apply to UK Banks (we have our own issues like Brexit, slower/slowing growth, no interest rate hikes, housing exposure (LLOY), government stakes (RBS), Asia exposure (HSBC, STAN) but the outlook for the US tends, nonetheless, to be a barometer for the rest of the world.

Now just because a share price falls 30% doesn’t mean it’s now 30% cheaper. The optimism that ushered the shares to those prior highs must have waned. Otherwise, why would the price have declined? Something must have changed. Fears of a US-China trade over there; Brexit and European woes over here.

Next week’s US results mean potential for an updated and improved US sector outlook. This could lead to a continued sector re-rating of shares, extending that late December bounce from 2018 lows. And with such similar share price performance on both sides of the Atlantic, good news and a favourable outlook from US banks could help the UK counterparts.

Don’t forget also that the UK banks offer attractive forward dividend yields, averaging 5.4% (STAN 3.7% to LLOY 6.4%) based on consensus estimated. 75% better than the 3.1% average of those US banks. This could further support UK names, offering chance for both capital appreciation via share price recovery and some generous income to boot.

In the meantime, for the latest on the US banks next week, and the impact on UK counterparts, subscribe to our Gold Pass research offering. Not only will you get a quality morning report summarising what’s going on. You’ll also benefit from a selection of easy to understand trading opportunities every day. Think stocks displaying momentum, confirming breakouts, trading near support or within defined ranges.

Mike van Dulken, Head of Research, 11 Jan 2019