UK Bank Earnings Previews

As the BOE raises rates, British banks should be making more money; but the prospect of loans going bad in a recession could mean investors stay away from UK bank shares.

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US major banks already reported results, and virtually all of them missed expectations for reasons that could be repeated across the pond: US money centre banks put more money aside in case customers wouldn't pay back their loans or would have to considerably delay or restructure their payments. That is something that happens during a recession, something that even the BOE is warning could happen in the UK.

Lloyds

Analysts are already pricing in this dynamic, as illustrated by the average of earnings forecasts compiled by the bank: Second quarter revenue is expected to increase to £3.01B but net profit to drop to £1.16B, with the "remediation" time doubling to £105M. "Remediation" is Lloyd's name for what other banks call "provisions". However, Lloyds has considerably more institutional investors, which could help maintain some price stability.

Barclays

Last quarter, Barclays beat estimates thanks to its retail customer focus. However, that might mean the bank will take more provisions this time around. Barclays is expected to have slightly lower revenues this quarter: £6.21B compared to £6.50B last time (and still well above the prior year). But the bottom line is expected to show just 6p in earnings compared to 8p last time. Investors are likely to focus on the investigation of Barclay's overselling of structured assets in the US, and whether it will have to put aside even more money to deal with that.

NatWest

NatWest earnings typically follow Lloyds, as both companies have similar customer profiles. However, NatWest has been returning lower dividends as it buys back the government's holdings. That process might be put on hold given the upcoming choppy economic conditions. NatWest is expected to report an increase in revenue to £2.18B, but a substantial drop in pre-tax earnings to £951M, due to a four-fold increase in provisions to £136M

How do the three fare?

Lloyds is in a better economic position than its peers, but the bank is down 10% year-to-date and Barclays more than 15%. Natwest, on the other hand, despite seeing no progress either, is not down YTD. It has risen more than its competitors, with pullbacks offering good technical opportunities.

NWG above 200-day average

Natwest’s share price fluctuated between 210p and 230p in June and July but progressed above both 50 and 200-day SMAs. Although a crossover is yet to be seen, it is currently at play, with the averages offering short-term support at 220p and 225p.

The 200-day has rejected bears and could lead to a range-top breakout, opening the door to 242p, 254p up, and subsequently hitting fresh highs above 258p. Should the attempt fail, a return back to 210p could ensue unless the SMAs hold firm. In the unlikely scenario the range breaks down, 200 is major round support.

Source: Spreadex trading platform

Key takeaways

UK banks might start to build up their reserves for recession, resulting in net profit drops. Barclays is mainly servicing UK retail but has a problematic US institutional division. Although Lloyds is expected to deliver better results than Natwest overall, NWG is positioned better above its technical 200-day average.