By Elena Vardon
U.K. banks are scheduled to report their first-quarter earnings this week and next. Investors are likely to focus on commentary on the outlook for 2024 in terms of net interest margin trajectory. Here is what you need to know, based on views shared by analysts in recent research notes, with focus on the top five U.K. banks: NatWest, Barclays, HSBC Holdings, Lloyds Banking Group and Standard Chartered.
WHAT TO WATCH:
--Net interest margin, or NIM--the difference between interest paid on deposits and that earned on loans--for the three months to March 31 will be closely watched as the metric is expected to continue slipping but at a slower rate, before recovering as the year progresses and central bank rate-cut expectations evolve. "Rate cuts are expected to be a headwind to net interest margin progression, so the longer it takes for this to happen the more resilient they are likely to be in the near-term," Shore Capital analyst Gary Greenwood wrote in a note.
"Despite a volatile backdrop for rates, we expect U.K. banks to guide positively on the earnings outlook, driven by a recovery in NIM in coming quarters," Barclays analysts Aman Rakkar and Grace Dargan echoed. "Bank of England monthly data has shown stability in deposit mix for the last 4 months up to February ... which we believe will lead to a trough in margins in Q1, at the latest Q2, once the worst of the mortgage margin pressure is over," Morgan Stanley analysts said, adding they see growth resuming in the second half and out to 2025 and 2026.
--The tailwind from the repricing of the structural hedge--a balance sheet exercise banks undertake to reduce their sensitivity to interest-rate moves--is expected to show in the print, "rather than loan growth which is likely to be muted with a nascent recovery in mortgages stalling in recent weeks," Barclays analysts wrote. "Structural hedges position the U.K. domestic banks well to deliver growing [net interest income] in 2H in almost any policy rate environment," UBS said.
--The market doesn't expect lenders to tweak the guidance they issued at full-year results in February. "We think it too early for upgraded income guidance at 1Q but the data is supportive of greater confidence on the profit and payout outlook," UBS analysts said. Shore Capital expects the lenders to reiterate their guidance for the full year, "with possible risk to the upside on net interest margin if interest rate cuts are going to take longer to emerge."
--For Asia-focused lenders HSBC and Standard Chartered, activity in Hong Kong's mortgage market is still very weak, Shore Capital said, adding that this is likely to restrict balance sheet growth. The debate for the two banks will center on the resilience of net interest income in the wake of higher-for-longer U.S. Federal Reserve rates, as well as their ability to flex costs, Citi said.
--In terms of cash returns to shareholders--a major element to the investment case for banks--"only HSBC pays quarterly dividends so there may not be too much detail here, but each of the banks is currently running a share buyback scheme," AJ Bell said. Citi expects HSBC to announce another $2 billion share buyback for the quarter and confirm the $0.21 special dividend from the sale of its Canada business. NatWest could also share an update on the planned retail placing the government is set to undertake this summer as it continues selling down its stake in the bank.
WHEN COMPANIES ARE SCHEDULED REPORT:
--Lloyds Banking Group: Wednesday April 24
--Barclays: Thursday April 25
--NatWest Group: Friday April 26
--HSBC Holdings: Tuesday April 30
--Standard Chartered: Thursday May 2
Write to Elena Vardon at elena.vardon@wsj.com
(END) Dow Jones Newswires
April 23, 2024 07:03 ET (11:03 GMT)
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