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UK banks: Here’s what to expect from Q1 results

Barclays is among the banks set to report Q1 earnings this week with HSBC and others to follow. Photo: Reuters / Hannah McKay.
Barclays is among the banks set to report Q1 earnings this week with HSBC and others to follow. Photo: Hannah McKay/Reuters (Hannah Mckay / reuters)

Banks on the FTSE 100 (^FTSE) are set to report their first quarter (Q1) results this week and next — starting with Standard Chartered (STAN.L) on Wednesday.

Investors will be keeping an eye on the inflows and outflows of deposits from each bank to help determine confidence.

It follows recent turmoil in the banking sector, which started in the US in March with the failures of Silicon Valley Bank and Signature Bank. Concerned about the safety of their money, customers withdrew funds en masse.

Separately, Credit Suisse (CS) was recently rescued by its Swiss rival UBS (UBS), following its own set of challenges.

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Despite the recent deposit withdrawal crisis in the US, the impact is not expected to be the same in the UK. The Bank of England also said at the time that there was no reason to worry about a knock-on effect.

Read more: Trending tickers: Credit Suisse | First Republic | Coca-Cola | Glencore | Bed, Bath & Beyond

“Due to the sheer size of high street banks like Barclays, NatWest and Lloyds, they are seen as a much safer place to deposit cash,” Giles Coghlan, chief market analyst, consulting for HYCM, said.

“The recent uncertainty in the banking sector has probably encouraged people to move their money into more reliable institutions in the last few months, which would lead to surprisingly positive earnings data in the next week or so.”

Barclays (BARC.L) is set to release Q1 results on Thursday, followed by NatWest (NWG.L) on Friday.

Next week, the focus will then turn to results from HSBC (HSBA.L) on Tuesday, and Lloyds (LLOY.L) on Wednesday.

Here’s what the analysts had to say in advance of the earnings due this week.

Standard Chartered (STAN.L)

Susannah Streeter, head of money and markets at Hargreaves Lansdown, noted that the excitement around a potential takeover has ebbed away and said worries about the risks ahead for Standard Chartered have weighed on its share price.

“Its pre-tax profit for Q1 is expected to be down slightly compared to the same period last year,” she said.

Read more: Is gold losing its mojo as the US dollar strengthens?

“Although net interest income has been rising, helped by higher interest rates, it won’t have moved the dial as much as with some of its peers, given the bank is much more reliant on revenues from fee earning businesses like wealth management which have been facing headwinds in the higher interest rate environment.”

The group has large exposure to some riskier commercial real estate debt in China, with related impairment charges chipping away at its full profit potential.

“Investment in the sector disappointed at the last snapshot despite Chinese authorities’ stimulus efforts to this niggling worry is set to linger,” Streeter said.

Barclays (BARC.L)

Streeter said Barclays is less reliant on traditional interest income for its profits and won’t have enjoyed as much of the benefit of higher base rates compared to some of its peers.

“Nonetheless, the ramping up of rates, with yet more hikes expected, will have benefited the bottom line,” she said.

“Although its model based on fees, commission and trading should offer greater potential growth over the long term, there may be evidence in this update that management is bracing for more short-term volatility, particularly with the world’s largest economy expected to tip into recession.”

Streeter also highlighted that as volatility has hit financial markets, fees for Barclays’ large investment division have been weaker than forecast, and said it has already been anticipating a higher number of loan defaults.

“Although indices have crept back upwards in recent months, uncertainty has been the order of the day and the slowdown in dealmaking which its investment arm relies on, is likely to have continued,” she added.

NatWest (NWG.L)

Meanwhile, NatWest has generated most of its income from interest payments on loans it makes to consumers and companies.

“It’s had a spring in its step as interest rate hikes have boosted its incomes,” according to Streeter.

Moreover, with the Bank of England expected to announce another rate hike in May to tame inflation, Streeter said this more positive environment will hang around for longer.

Read more: Wall Street opens little changed as investors brace for tech earnings

“However, weakness is being sniffed out further ahead, given the expectation that rates will start to come back down as inflation falls back in the second half of the year and NatWest doesn’t have as many diversified income streams to rely on as some of its peers,” she said.

“The banking scare may have put another spanner in the works as some banks are expected to take defensive action and try and attract more deposits by offering higher rates to savers which could eat further into net income margins.”

However, NatWest is well capitalised, running on a Common Equity Tier ratio of over 14%, which is a comfortable position to be in.

Other factors to watch

Naeem Aslam, chief investment officer at Zaye Capital Markets, said another important factor to watch out for in earnings reports will be the default ratio that banks are experiencing due to the higher interest rates and what they anticipate in the coming months.

“Remember, over a million mortgages are only due for renewal in London, and these people will be paying double the interest rate they paid before. This means higher default rates,” he said.

Jameel Ahmad, chief market analyst at CompareBroker.io, said the higher interest rate environment is likely to lead to UK banks repeating the same narrative as their Wall Street peers.

“Which is that the higher interest rate environment is lifting profitability prospects higher,” he said.

Watch: Credit Suisse stock rises after Q1 profit, liquidity shares

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