Why have in­vestors fallen out of love with UK banks? / Weak out­look at Whit­bread / US vs Eu­ro­pean earn­ings sea­son / UK div­i­dends reach record highs / In­vestors pre­pare for the Bud­get and rate de­ci­sion

Loan and de­posit growth, plus div­i­dends, will be the fo­cal points in the lat­est re­port­ing sea­son

Shares - - CONTENTS DISCLAIMER -

De­spite mostly pos­i­tive first-half re­sults, UK banks are com­pletely out of favour with in­vestors so there’s a lot hang­ing on re­ports this week from three of Bri­tain’s big­gest lenders.

Lead­ing the way is Bar­clays (BARC) which on 24 Oc­to­ber re­ported con­tin­ued steady growth in its third-quar­ter pe­riod.

Pre-tax profit ex­clud­ing lit­i­ga­tion and PPI charges grew by 23% com­pared with 20% in the first half, thanks to lower pro­vi­sions for bad loans. The bank also man­aged to trim op­er­at­ing costs by 3%, keep­ing its cost-in­come ra­tio steady.

Bar­clays has the high­est net in­ter­est mar­gin of the three (the re­turn it gets on loans mi­nus the cost of cus­tomer de­posits), but loan and de­posit growth is anaemic for Bar­clays and oth­ers.

Lloyds’ (LLOY) third quar­ter fig­ures were due to be re­leased as this is­sue of Shares was pub­lished (25 Oct). The bank also had a strong first half with profit-af­ter-tax up nearly 40% thanks to higher rev­enues and lower PPI charges.

Its net in­ter­est mar­gin isn’t far be­hind Bar­clays and it has by far the low­est cost-to-in­come ra­tio. It also wins the prize for the eas­i­est-to-de­ci­pher re­sults state­ment.

There has been spec­u­la­tion that Lloyds could dou­ble its share buy­back to £2bn next year as well as rais­ing its div­i­dend.

Fi­nally Royal Bank of Scot­land (RBS) re­ports on Fri­day 26 Oc­to­ber. It’s the weak­est of the three in terms of cost-to-in­come and net in­ter­est mar­gin and first-half re­sults were un­re­mark­able with to­tal in­come fall­ing 3%.

How­ever all eyes will be on the div­i­dend pol­icy. The bank paid 2p per share on 12 Oc­to­ber, its first div­i­dend in a decade af­ter re­turn­ing to profit last year, and share­hold­ers will be keen to know whether they can ex­pect fur­ther pay­outs.

RBS is still ma­jor­ity-owned by the UK Trea­sury (62%) af­ter it had to be bailed out dur­ing the cri­sis.

A re­cent study by the Bank of Eng­land sug­gests banks are cut­ting back on lend­ing par­tic­u­larly to con­sumers, rather than try­ing to grow their loan books.

The lat­est Credit Con­di­tions sur­vey shows that, ex­clud­ing re­mort­gages and credit cards, the banks of­fered less credit to house­holds last quar­ter and ex­pect to of­fer less again this quar­ter even though de­fault rates are fall­ing.

The rea­sons seem to be two-fold. First, the in­ter­est mar­gin or ‘spread’ on lend­ing to house­holds is ex­pected to nar­row sig­nif­i­cantly this quar­ter so the banks will earn less.

Sec­ond, the Bank of Eng­land is un­happy with the amount of new loans this year to com­pa­nies which al­ready have a lot of debt.

This in­crease in ‘lever­aged’ lend­ing and lower un­der­writ­ing stan­dards mean the banks may be tak­ing on more risks than is healthy, so as a re­sult they are ex­pected to de­crease the amount of lend­ing to con­sumers. (IC)

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