By Elena Vardon
The upcoming third-quarter earnings for U.K. banks are expected to reflect the tough operating environment they currently face. Mortgage margins and volumes, deposit mix, and loan demand are being impacted by high interest rates. While investors are keen to understand the implications for the end of the year and beyond, executives are unlikely to provide specific guidance or announce capital-return plans at this stage. Here is an overview of what you need to know, based on insights from UBS, Citi, RBC, and Jefferies analysts as seen in recent research notes.
What to Watch
The banks' net interest margin will be closely watched by the market. This margin represents the difference between what the banks earn on loans and what they pay out on deposits. During the three months ending September 30, pressures from mortgage refinancing and contracting deposits, due to lower volumes and migration, have put a strain on this margin. "A faster increase in rates to a higher level than expected has created a stronger financial incentive for both types of behavior than it appears industry had expected. And this is costly," according to UBS analysts.
Investors will be on the lookout for clues about what these figures mean for the fourth-quarter performance. UBS highlighted that management teams have indicated margins should broadly stabilize from fourth-quarter rates in 2024. "The job of 3Q is to discern how much further they fall in 4Q and what 'broadly stabilize' means," analysts at the brokerage commented. Citi analysts noted that net interest margins could prove resilient after third-quarter declines, with structural hedges offsetting further deposit beta increases and continued mortgage margin compression.
Income from structural hedges, which are designed to reduce banks' sensitivity to interest-rate moves, is expected to experience further growth due to rising swap rates, as mentioned by Jefferies analysts. "With U.K. banks' structural hedge income correlated to 3.5 year changes in U.K. swap rates, banks are set to see continued interest income growth as the delta grows in 3Q," they wrote.
Outlook for 2024
Investors are turning their attention to the outlook for 2024 as they consider earnings prospects for the coming year. However, experts from UBS caution that management teams are likely to avoid discussing next year's outlook until next year itself. Meanwhile, RBC and Jefferies analysts anticipate that structural hedge income in 2024 will generate revenue tailwinds or offset current headwinds.
International Banks vs. Domestic Banks
While domestic banks may experience a lackluster third quarter without any significant catalysts, UBS and Jefferies analysts suggest that international banks are better positioned due to their unique earning opportunities. HSBC's exposure to the Hong Kong Interbank Offered Rate and Standard Chartered's presence in Asia are expected to provide these banks with positive momentum. Additionally, the weakness of the pound sterling in the quarter is anticipated to slightly dampen reported revenue for Barclays but benefit HSBC and Standard Chartered.
Share Buyback Programs
Analysts predict that banks will unveil substantial share buyback programs during the fourth-quarter and full-year results, specifically when providing guidance on the 2024 return on tangible equity. This strategy is reflected in company-compiled consensus estimates, with the exception of HSBC, which is not expected to include any share buyback forecasts. UBS, however, predicts that HSBC will announce a $2 billion share buyback program during its third-quarter results. Jefferies anticipates Lloyds Banking to follow suit based on its capital position, despite their historical pattern of annual distribution announcements.
Key Dates for Banks' Earnings Announcements:
- Barclays: Tuesday, October 24
- Lloyds Banking: Wednesday, October 25
- Standard Chartered: Thursday, October 26
- NatWest: Friday, October 27
- HSBC: Monday, October 30