22nd Apr 2022 14:49
(Alliance News) - UK banking earnings season kicks off next week, with Asia-focused lender HSBC Holdings PLC stepping up to the plate first, with UBS predicting resilient updates.
HSBC Holdings will kick things off on Tuesday, reporting at 0500 BST, with Lloyds Banking Group PLC on Wednesday, Barclays PLC and Standard Chartered PLC on Thursday and NatWest Group PLC on Friday.
UBS analysts Jason Napier and Sanjena Dadawala said: "We expect resilient trading with decent retail loan growth in residential lending and [credit] cards, improving interest margins driven by Bank of England rate hikes and record bank liquidity levels, and lower-than-normal loan loss run rates despite lower GDP growth forecasts."
The Bank of England has raised interest rates for three straight meetings, starting in December 2021, as widely expected, in a bid to tame inflation.
At the last meeting, in March, there were four hawkish dissenters, pushing for a chunkier 50 basis point hike. At the March meeting, the BoE raised the Bank Rate by 0.25 percentage point, to 0.75% - where it is now at its pre-Covid level, having been cut as low as 0.10% after the onset of the pandemic.
The increased rate from the central bank means retail lenders can generate more net interest income on the loans they issue.
AJ Bell said: "The big US banks have, to some degree at least, set the tone for the Big Five FTSE 100 firms, with a return to taking loan loss provisions -rather than writing back 2020’s provisions in 2021, increased investment in digital services and lower levels of income from investment banking operations weighing on earnings, but with higher interest rates offering the prospect of increased net interest margins and interest income going forward."
UBS agreed, believing UK high-street lenders are currently "attractively valued".
"Domestic banks [shares] under our coverage are down 2% to 20% year to date despite a curve which now implies a 250bps rate cycle - enough to add 30% to net interest income, 50% to PPP on bank numbers - and no recession as the base case. We think the shares are attractively valued at 7.4 times 2023E EPS," it continued.
UBS feels the revenue outlook for UK's banks is good.
It said: "Even as household budgets come under pressure, we still expect a (modest) recovery in fee income, disrupted car supply chains are supporting second hand car vehicle prices for longer and move in mix back towards unsecured credit usage. Most important, however, is the benefit to net interest income tallies from higher policy interest rates."
The depressed prices, UBS said, is likely stemming from loan loss worries.
"We expect household finances to see pressure from higher energy bills and taxes but don't see material P&L risk from the household sector: loan mix, record collateral values, excess customer deposits and management overlays provide substantial cover, we think," UBS added.
UBS did admit there is downside pressure facing UK lenders as the country fights a cost of living crisis.
GfK's Consumer Confidence Index - which tracks UK consumers' views of their finances and the economy - fell five points to minus 31 in March as consumers confront a "wall of worry" amid 30-year-high levels of inflation.
It is the fourth month in a row that the survey's headline figure has dropped, to a level last seen in October and November 2020 when Covid numbers were rising.
Confidence in personal finances over the next 12 months fell four points to minus 18 – which is 28 points lower than this time last year.
GfK client strategy director, Joe Staton, said: "Consumers across the UK are experiencing the impact of soaring living costs with 30-year-high levels of inflation, record-high fuel and food prices, a recent interest-rate hike and the prospect of more increases to come, and higher taxation too – all against a background of stagnant pay rises that cannot compensate for the financial duress.
"Confidence in our personal financial situation and in the wider economy are severely depressed while the daily news of unimaginable suffering from a horrifying war in Europe and rising Covid numbers at home is adding to the bleak mood."
Turning back to UK banks, UBS feels the credit risks are "exaggerated in valuations if our macro base case proves roughly right".
The Swiss bank feels UK lenders have seen a further recovery in loan spreads.
"Two-year and five-year mortgage rates rose 20bps and 30bps [month-on-month in April], seeing spreads to swaps rise 2bps and 11bps [month-on-month in April]. Big bank deposit costs are yet to move: those near zero deposit betas, record central bank reserve levels and rising asset yields should, we think, produce the fastest domestic bank revenue growth seen since the global financial crisis [in 2008]," UBS explained.
As a result, UBS confirmed its belief UK banks are trading at a "significant discount".
By Paul McGowan; [email protected]
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