EARNINGS PREVIEW: Trading, Special Factors To Lift UK Banks
July 24 2009 - 3:43AM
Dow Jones News
TAKING THE PULSE: U.K. banks' first-half results will reflect a
mix of good news from investment banking activity and bad news in
the form of further deterioration in mortgage and corporate loans
from a distressed economy. Exceptional items and other accounting
nuances mean headline profit or loss numbers will require a closer
look.
Some analysts have been loath to predict what the bottom line
will be when the banks start reporting Aug. 3, because gains from
asset sales, debt buybacks and mark-ups on securities could tip the
balance between a profit and a loss.
Exactly two years after the credit crisis changed the world of
banking forever, shareholders should get some cheer from trading
gains in investment banking divisions and rising margins in retail
lending.
The Bank of England's injection of GBP116 billion through bond
buying, and other BoE programs, have helped stabilize market
conditions since March. Some assets that helped trigger the crisis
in August 2007 could even be marked up by banks holding them in
their trading book, as investors looking for bargains have crept
back into some areas of structured credit markets.
But optimists hungry for signs of a U.K. economic recovery will
have little to chew on. Lending volumes remain a fraction of what
they were in the boom times, and bad mortgage and corporate loans
continue to pile up.
Most of the U.K.'s biggest banks aren't in the clear yet either
when it comes to capital hikes, some analysts say. Though the U.K.
Financial Services Authority has given the banks a clean bill of
health for now, government proposals are calling for more-stringent
rules on capital cushions. Broader regulatory reform in Europe and
internationally could result in investment banking units having to
hold more capital to support their activities, among other
reforms.
Such concerns may be overlooked, though, when investors digest
what on surface may look like a return to growth by banks in the
first half.
"Strong first-half results are a foregone conclusion, driven by
one-offs such as debt swap gains, gains on disposals, and by very
strong credit and equity markets. The big question is the outlook
for bad debt," said Sandy Chen, analyst at Panmure Gordon, who
anticipates loan impairments will climb above expected levels in
the second half of 2009 and throughout 2010.
Loan impairments will certainly get their share of the
headlines, with Lloyds Group PLC (LYG) and Royal Bank of Scotland
Group PLC (RBS) - the two banks that came closest to collapse from
the crisis and had to be bailed out by the government - seen
reporting some of the worst levels of bad debt.
ANALYSTS' PICK
Barclays PLC (BCS) could well emerge with the strongest numbers,
analysts predict, almost exclusively because of the stellar
performance of its Barclays Capital division. Like U.S. banks that
have recently reported impressive second-quarter earnings, Barclays
Capitals' trading operations - including the former Lehman Brothers
U.S. business it bought when that bank collapsed last year - will
have benefited from high levels of activity. Whether it can sustain
that growth, however, is up for dispute.
COMPANIES TO WATCH:
HSBC (Monday, Aug. 3)
MAIN FOCUS: HSBC Holdings PLC (HBC) should get a boost from its
investment banking unit and is expected to turn an underlying
pretax profit. In its first-quarter update, HSBC said operating
performance was "encouraging" and that loan impairments in its
troubled U.S. consumer lending business were lower than in the
fourth quarter of 2008. More pain is seen from the U.S. unit, while
depressed net interest margins on customer deposits and one-off
items will add to the drag on earnings. Profit numbers will also be
hit by the accounting treatment of HSBC's $17 billion rights issue
in March. Keefe, Bruyette & Woods forecasts a $16.11 billion
impairment charge and a $1.45 billion pretax profit for the six
months.
Barclays (Monday, Aug. 3)
MAIN FOCUS: Barclays is probably in the best position to wow
investors after two strong quarters at Barclays Capital and a net
gain of GBP5.3 billion from its June sale of Barclays Global
Investors. The bank indicated in June that second-quarter
impairment charges would be broadly the same as the first quarter's
GBP2.3 million. Macquarie expects a GBP3.79 billion pretax profit,
after GBP4.5 billion impairment charges. The sustainability of
revenue growth is the main concern for many analysts. Debt analysts
at RBC fear Barclays will take on too much risk and "stray from the
path of capital righteousness," while JPMorgan prefers the bank to
the others, but frets it may need to come up with GBP12.8 billion
in additional capital by the end of next year to meet potential
regulatory changes.
Standard Chartered (Tuesday, Aug. 4)
MAIN FOCUS: Standard Chartered PLC (STAN.LN) has deflected many
of the problems faced by its U.K.-based peers by making most of its
money in emerging economies and having relatively little exposure
to the U.K. and U.S. In May, it said the first five months of the
year produced record levels of income and profit, particularly in
wholesale banking. First-half pretax profit is seen around $4
billion, and analysts will be looking for news of any acquisitions
in markets being exited by other banks.
Lloyds (Wednesday, Aug. 5)
MAIN FOCUS: Lloyds warned in May that full-year corporate loan
impairments should be around 50% higher than in 2008 - putting them
at roughly GBP14 billion. The biggest blight on its loan book has
been U.K. and Irish commercial property that plummeted in value and
put developers out of business. The bank is taking out insurance
from the U.K. government - its 43.5% owner - to protect itself from
losses on a GBP250 billion loan portfolio, but it has to cover the
first GBP25 billion in defaults. Accounting tweaks could also
feature here, with speculation that Lloyds could mark up the value
of certain securities that were considered almost worthless at the
height of the crisis last year but have since seen modest
gains.
Royal Bank of Scotland (Friday, Aug. 7)
MAIN FOCUS: Royal Bank of Scotland Group PLC (RBS) is also seen
benefiting from gains in its investment banking activities, but its
focus on fixed income means it probably won't have done as well in
the second quarter as those with big equity trading franchises.
Morgan Stanley sees a GBP1.5 billion pretax profit, after GBP5.43
billion in provisions for bad and doubtful debts. The bank has said
it will take three to five years to rebuild shareholder value,
which may sound like a long time to U.K. households, since they are
the 70% owner of the bank via a government stake.
-By Margot Patrick, Dow Jones Newswires; +44 (0)20 7842 9451;
margot.patrick@dowjones.com