Wednesday preview: Barclays first to report from unloved banking sector
The UK banking sector is down 15% since the start of August and Wednesday sees Barclays kick off the sector's third-quarter reports.
After Barclays comes peers Lloyds and RBS later in the week and HSBC next week.
Banks have been hit much harder than the rest of the FTSE 350, which is down around 8% in the same period.
Confidence in UK domestic lenders, currently trading on just 7-7.5 times earnings estimates for 2019, is mostly weak due to Brexit fears, said Lee Wild, head of equity strategy at Interactive Investor.
"UK interest rates have risen slightly, which is normally good for bank sector margins as lenders typically increase the cost of mortgages and loans more than savings rates," he said. "But borrowing costs remain at historically low levels, and any downturn in the economy - possibly triggered by a messy Brexit – could negatively impact on demand for bank products."
Barclays', which has seen its shares tumble almost 19% since the start of 2018, has been reporting lower operating margins in its home market but the FTSE 100 group is far from just a domestic lender; it is the biggest European investment bank in the US, with its American business accounting for around 60% of its global investment banking activities and roughly 50% of the group's business is in the US.
Given this, the group generally benefits from a stronger US dollar, so analysts expects around a 2% tailwind quarter-over-quarter.
Analysts at Berenberg recently upgraded their stance on the shares as they feel the market is under-appreciating this corporate and investment bank.
"[Barclays] has strongest franchise of any non-US bank in the profitable US investment banking market and is gaining market share. We believe Barclays investment banking returns can rise towards 9% by full year 2020, with group returns bolstered further by its best-in-class UK business."
In the first half of the year, excluding the sizeable £2bn of litigation and conduct charges, the bank's underlying performance beat market forecasts, with profit before tax up 20% to £3.7bn as credit impairment charges almost halved to £571m from £1.05bn and underlying operating costs fell 5% to £6.7bn.
In the corporate and investment banking division, the third quarter has been a weak one in the past but UBS was among those recently given given a positive steer by management on the potential for upswing in CIB returns, "this is consistent with further – likely modest – market share gains on investment in leverage exposure, tech, people", UBS said.
In the rest of the international business, management have been targeting 10% compound annual growth in US credit cards from 2016 to 2019, though UBS noted "some concerns amongst investors" about building credit volumes at this stage of the credit cycle.
Looking at the UK business, UBS said the impact of the Bank of England's August rate hike would be in question as it would be "relevant for 2019 assuming Brexit transition leads to greater confidence in further hikes to come".
In the second quarter of the year, Barclays' UK net interest margin was down to 3.22% from 3.27% in the first and 3.32% at the end of last year. Management has guided for 3.20-3.30% for 2018 overall.
"Given mortgage margin pressures we expect this to be an area of focus for investors, though it is a smaller impact for Barclays," said Deutsche Bank, which does not expect a top-up to PPI provisions this quarter but £600m in the following two.
For the group as a whole, UBS forecasts adjusted PBT of £1.1bn, tangible net asset value per share per share of 258p and a core equity tier-1 capital ratio of 13.0%.
Wednesday October 24
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