adminBy Elena Vardon
U.K. banks’ upcoming third-quarter earnings are expected to reflect the tough environment the lenders are continuing to operate in as high interest rates weigh on mortgage margins and volumes as well as deposit mix and loan demand. Investors will focus on what this means for the end of the year and the year ahead, though executives are likely to shy away from sharing guidance or announcing capital-return plans at this stage. Here is what you need to know, based on views shared by UBS, Citi, RBC and Jefferies analysts in recent research notes.
WHAT TO WATCH:
–INTEREST MARGINS: The market will focus on the banks’ net interest margin–the difference between what they earn on loans and pay out on deposits–given the pressures over the three months ended Sept. 30 from mortgage refinancing and contracting deposits from lower volumes and migration. “A faster increase in rates to a higher level than expected has created a stronger financial incentive for both types of behavior than it appears industry had expected. And this is costly,” UBS analysts said.
Investors will be looking out for clues on what the figures foretell for the fourth-quarter print. UBS noted that management teams have guided for margins to broadly stabilize in 2024 from fourth-quarter rates. “The job of 3Q is to discern how much further they fall in 4Q and what ‘broadly stabilize’ means,” analysts at the brokerage said. Citi analysts noted that net interest margins could prove resilient after third-quarter declines with the roll-over of structural hedges offsetting a further rise in deposit betas and remaining mortgage margin compression.
–INTEREST INCOME: Income from structural hedges–the balance sheet exercise that reduces banks’ sensitivity to interest-rate moves–is primed for further growth given rising swap rates, Jefferies analysts said. “With U.K. banks’ structural hedge income correlated to 3.5 year changes in U.K. swap rates, banks are set to see continued interest income growth as the delta grows in 3Q,” they wrote.
–GUIDANCE: Comments on outlook for 2024 are expected to be on investors’ radar as they start thinking about earnings for next year. However, “management teams [will] likely [be] looking to avoid talking about next year, until next year,” UBS said. Analysts at RBC and Jefferies noted that structural hedge income in 2024 is expected to provide revenue tailwinds, or at least offset the current headwinds.
–INTERNATIONAL VS DOMESTIC: Domestic banks are likely to post a muted third quarter absent of catalysts despite their attractive valuations, analysts at UBS and Jefferies noted. In contrast, they pointed to international banks, which are seen better positioned given that they have idiosyncratic tailwinds to earnings with HSBC’s exposure to the Hong Kong Interbank Offered Rate and Standard Chartered’s Asian presence. Weakness in the pound sterling in the quarter should slightly dampen reported revenue momentum for Barclays and be helpful for HSBC and Standard Chartered, UBS added.
–BUYBACKS: Analysts assume banks will prefer to unveil bigger share-buyback programs at fourth-quarter and full-year results, when guiding for 2024 return on tangible equity. Company-compiled consensus for all but HSBC reflect this as no buyback is penciled in to their estimates. HSBC’s consensus doesn’t include share-buyback forecasts though UBS expects it to announce a $2 billion program at third-quarter results. Jefferies sees one for Lloyds given its capital position but noted that this would represent a break from its track record of announcing distributions annually.
SCHEDULE:
–Barclays: Tuesday Oct. 24
–Lloyds Banking: Wednesday Oct. 25
–Standard Chartered: Thursday Oct. 26
–NatWest: Friday Oct. 27
–HSBC: Monday Oct. 30
Write to Elena Vardon at [email protected]
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