12th May 2023 16:29
(Alliance News) - In the first quarter of 2023, mainstream UK banks consistently delivered profits ahead of consensus expectations, meaning the sector remains attractive, according to research from Shore Capital.
This is despite recent banking woes particularly in the US and fears of a consequential contagion spreading across the global banking sector, as Shore argued funding and liquidity remained strong and it did not see "the issues currently being faced by some regional US banks as being relevant to the mainstream UK banks".
Assessing the performance of six mainstream UK banks, Shore noted rising pretax profits for each lender, bar Virgin Money UK PLC.
HSBC Holdings PLC led the pack, with first quarter pretax profit more than trebling to USD12.89 billion from a year earlier.
Shore said this beat consensus by 49%, primarily due to the reversal of an impairment on the French retail business worth around USD2.0 billion and acquisition gain on Silicon Valley Bank UK of USD1.5 billion, which had not been fully captured in forecasts.
Barclays PLC's first quarter pre-tax profit was up 16% to GBP2.60 billion from a year earlier, beating consensus by 17%; Lloyds Banking Group PLC rose 46% to GBP2.26 billion, beating consensus by 14%; NatWest Group PLC rose 49% to GBP1.82 billion, beating consensus by 16%; while Standard Chartered PLC rose 21% to USD1.81 billion, beating consensus by 27%.
An outlier of the six, Virgin Money's first quarter pretax profit fell 25% to GBP236 million, although this did beat consensus by 5%.
Key takeaways for the sector included net interest income showing strong annual growth, according to Shore, primarily due to margin expansion that has been driven by higher interest rates.
Shore also noted strong non-interest income growth, although at a slower rate than net interest income, with financial markets income "a notable bright spot relative" to expectations, as FICC trading continued to benefit from "buoyant conditions in those markets".
As a result, Shore reiterated 'Buy' ratings for each of the six UK lenders it covered.
Barclays was set a target price of 315 pence per share, having traded up 0.5% to 154.22p each in London on Friday afternoon; HSBC's target price was 765p, compared to latest trading rises of 1.3% to 601.30p; Lloyds was targeted to reach 69p from falling 0.4% to 45.68p; NatWest 405p from rising 0.7% to 261.60p; StanChart 960p from falling 0.7% to 616.00p; and Virgin Money 305p from rising 1.8% to 152.80p.
"The sector remains attractive, in our view, with an average upside to fair value of 66%," said Shore analyst Gary Greenwood. "Full year [return on tangible equity] guidance was reiterated and so our forecast changes are generally modest.
"Most banks demonstrated positive operating leverage with income growth exceeding operating cost growth, despite inflationary pressures," Greenwood continued, noting Barclays as an exception, "where a sharp reduction in litigation and conduct charges allowed for an increase in operating cost investment".
Shore said all six banks delivered double digit returns on tangible equity, above consensus expectations.
Underlying credit quality remained benign despite the weak macro-economic backdrop, Shore said, with only marginal signs deterioration in arrears performance of some portfolios, while impairment ratios remained at or below through-cycle average.
Shore said capitalisation remains strong across the UK banking sector, with reported CET1 ratios in line with or above target ranges.
It noted that the first quarter was a "quiet period" for shareholder distributions, although HSBC "surprised us" by announcing a USD2 billion share buyback.
By Greg Rosenvinge, Alliance News reporter
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