18th Oct 2023 13:00
(Alliance News) - The London-listed banking sector's reporting third-quarter season kicks off with numbers from Barclays next week, but if recent share price movement is anything to go by, expectations heading into the results are tepid.
Over the past three months, shares in NatWest Group PLC are down around 8.4%, Barclays down 3.9%, Lloyds Banking Group PLC is 5.2% lower and Virgin Money UK PLC has given back 6.5%.
Asia focused Standard Chartered PLC and HSBC Holdings PLC have fared better, however, up 7.0% and 4.6%, though a tough economic outlook in China still hangs over the duo.
But shares in the sector could get a boost if the firm's give more robust than expected forward guidance, broker Shore Capital Markets believes.
"Valuations across the sector remain unjustifiably depressed, in our view, with scope for a significant re-rating should there be any hint of a brighter economic outlook," Shore analyst Gary Greenwood commented.
As a result, Shore maintained its 'buy' recommendation on the lenders. Barclays tops its order of preference, just ahead of Virgin Money, with NatWest also on the podium. Lloyds, StanChart and HSBC round off the rear.
Looking ahead to the results, Shore expects to see "subdued" loan book growth amid tough economic conditions and a "weaker housing market".
"Although we would normally expect the Asia-focused banks to have structurally better growth opportunities, we note economic uncertainties in China and the likely negative impact this is having on sentiment in the region, meaning loan book growth here is also likely to be subdued, in our view," Greenwood said.
Net interest margins are expected to be up sharply on annual basis, though they are likely to be flat at best quarter-on-quarter, Shore predicted.
While banks are doing a "reasonable job controlling their costs bases" in the face of rampant inflation, impairments may rise, but Shore's Greenwood believes there is "no need to panic".
"Banks already hold reasonable levels of provision coverage in anticipation of a pick-up in arrears. Therefore, while Q3 is likely to have seen an increase in arrears, we view this as a natural and expected development and do not see it necessarily translating into materially higher than expected impairment charges. Instead, we expect banks to reiterate guidance for full year impairment charges to end up broadly within a 'normalised' range, which will naturally vary from bank to bank depending on their relative mix of business," the analyst added.
Greenwood expects to see double-digit returns on tangible equity, with full-year guidance also reiterated.
Capital generation will be "robust", though while banks usually do not set out distributions in the third-quarter, HSBC may be an exception this time round.
"Others, most notably Lloyds, are likely to wait until the year-end before showing their hand on further special distributions," Shore's Greenwood added.
Overall, Shore believes valuations in the sector "remain undemanding".
Greenwood summarised: "Calling the turning point for bank shares is always difficult given the importance of hard-to-predict macroeconomic, political and regulatory variables. Instead, we simply wish to highlight the significant undervaluation in the sector, which we expect to be corrected in time, if our thesis is correct."
By Eric Cunha, Alliance News news editor
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