Outlook is key

We are just days away from learning how one of the UK’s most important sectors fared in terms of financial performance in the three months to end-March (Q1). More importantly, we’ll find out how their key “outlook” statements stack up versus investor expectations for the rest of 2018.

Banks are an important barometer of growth given they grease the wheels of the economy, providing financing and a home for money. How much growth they report offers a gauge of business and consumer confidence, which can influence investor sentiment and – key for us – share prices.

Well off their Brexit vote share price lows of June 2016, the sector has staged an impressive recovery (+55%), even if off their best levels of early 2018, caught up in the recent market correction. Might Q1 results be the catalyst for the shares to turn north?

This preview looks at the drivers/trends in play for the UK banks, what their share price charts look like, how US Banks are influencing, and what to look out for in next week’s first quarter updates.

With an average 3-6% share price range for sector constituents reporting quarterly results since 2012, will we get the same, or better? Could you trade the early 8am response to results? What about the traditional rally in the run-up to results?

Banking Central

The last year or so has already been beneficial for financials. Not just with stock markets rallying on hopes of US stimulus and deregulation. Central Banks have also played their part, tightening policy/raising interest rates, which boosts banks’ profitability by allowing them to charge more for what they lend versus what they pay for funds held on deposit (Net Interest Margin – NIM).

The US Federal Reserve (Fed) continues to increase US interest rates, normalising policy in response to an ever-improving US economy.

The European Central Bank (ECB) has already begun tapering its bond-buying stimulus programme and recently offered more hawkish/less dovish outlook, suggesting the Eurozone economy is still gradually improving, needing less help.

Whilst US rates are important for international banks the Bank of England’s stance is also important for domestic UK activity. Expectations are for a UK interest rate rise in May to counter persistently above-target inflation since the UK referendum weakened GBP Sterling.

This would mean a welcome profitability boost for our quartet of listed UK high street banks. In fact, only recently (21 Mar), analysts at Barclays suggested Lloyds and RBS’ future NIMs could beat expectations by retaining more benefit from rising interest rates than markets currently assume, with a low deposit beta meaning less interest rate rise benefit passed on to savers versus that imposed on borrowers.

Access all areas?

Whilst there is still a significant element of Brexit uncertainty, things have calmed. GBP continues to strengthen, suggesting optimism that the ultimate exit deal from the EU won’t prove too detrimental to UK companies, including the banks.

Given the importance of London to many European financial institutions, it is likely that a work-around is arrived at to ensure that UK financial institutions retain access to continental markets. What the deal ultimately looks like, though, remains to be seen, with politicians on both sides still playing hokey-cokey in terms of red lines and concessions.

Although the impact on UK banks is an unknown (domestic focused likely less sensitive than more international exposed), if the UK were to lose access to the continent it would surely imply reduced profitability and thus hurt share prices.

With a year to go until the Brexit transition period begins, will the big banks’ management outlook statement have anything to say about their plans and how they view the situation as it stands?

What to expect from next week’s results?

Analysts at Deutsche Bank expect margin pressure to remain the focus for UK domestic lenders in Q1 updates, with a still highly competitive UK mortgage market (Lloyds Banking has the largest UK mortgage book, so could be most exposed).

As for the lenders with more international exposure, Deutsche expects currency swing to benefit Q1 dollar revenues but are wary of cost inflation at both HSBC and Standard Chartered.

Deutsche analysts remain overweight of UK domestic banks (LLOY, RBS), neutral on internationals (BARC, STAN, HSBC) and underweight Challengers (e.g. Metro, CYBG, Virgin) – [Source Proactive Investors, 11 April 2018]

Stateside affairs

In terms of US banks, JPMorgan, Wells Fargo, and Citigroup have all reported consensus beating Q1 results today (Friday), all three’s share trading higher.

Citigroup (revenues +3%, profits +13%) benefited from lower tax and strong equity trading (revenues +38%) on increased market volatility, consumer banking (+7%) saw growth across all regions, although bond trading (-7%) disappointed.

JPMorgan posted a record Q1 profits (+35%) with solid revenues growth across its main divisions (Consumer, Investment Banking, Commercial, Asset Management), and a profit boost from accounting changes.

Peers Bank of America, Morgan Stanley and Goldman Sachs follow up next week on Monday, Tuesday and Wednesday, respectively. Can they keep the sector flag flying before their UK counterparts take the baton?

Dates for your diary

Given the importance of the sector, in terms of outlook and read-across, it’s no surprise to have all four of the major UK high street banks reporting the same week. Be prepared for share price reactions to both each bank’s own results and those of its peers across.

Lloyds kicks off proceedings with Q1 results on Weds 25 April, followed by Barclays on Thurs 26, Royal Bank of Scotland on Fri 27 and HSBC closing the season a week later on Fri 4 May. Not a UK high street bank, but listed on the UK Index , peer Standard Chartered reports on Weds 2 May.

Next we analyse the reaction to major UK banks’ FY results updates, including the performance of shares in the following days and weeks, and preview the major talking points of their pending Q1 update.