Will the FTSE 100 banks’ Q3 earnings show any impact of the UK’s economic woes?

AJ Bell press comment – 18 October 2022

• FTSE All-Share banks sector down by a fifth over the past year
• US megabanks Q3 earnings have provided some reassurance despite increased loan losses
• Net interest margins and loan loss provisions are the key figures for Big Five FTSE 100 banks when they report third-quarter numbers next week

“The third-quarter results from the Big Four US megabanks pleased their investors and shareholders in the Big Five FTSE 100 banks will be hoping for more of the same from HSBC, Barclays, Standard Chartered, Lloyds and NatWest when they report their latest earnings between 25 and 29 October,” says AJ Bell investment director, Russ Mould. “The US banks showed less sign of economic stress than analysts expected as loan growth accelerated, net interest margins expanded, and dividends remained generous. Even so, it was not all sweetness and light because loan loss provisions increased and Bank of America, Citigroup, JP Morgan Chase and Wells Fargo started to cut back on share buybacks in the second quarter, to suggest they were preparing for tougher times ahead.

“It’s probably too soon for the UK’s big banks to show any fallout from Kwasi Kwarteng’s mini-budget on their profit and loss accounts or balance sheets, as the former chancellor gave his statement on 23 September, with just a week to go before the quarter end.

“Nevertheless, analysts and shareholders will look to see if there are any tell-tale signs of an economic slowdown in the UK (and in the case of HSBC and Standard Chartered in Asia) when they report their third-quarter profits.

“To some degree, investors are already preparing themselves for bad news – the FTSE All-Share Banks index is down by 19% over the past year, although that is a little less than the 26% in America’s Philadelphia KBW Banks index.

Source: Refinitiv data

“Nerves over rising interest rates, government bond yields and soaring mortgage costs on both sides of the Atlantic as well as weak GDP figures explain this caution, which to some degree looks justified by the third-quarter results from the US Big Four.

“Aggregate net profits from Bank of America, Citigroup, JP Morgan Chase and Wells Fargo fell 18% year-on-year in the third quarter.

Source: Company accounts for Bank of America, Citigroup, JP Morgan Chase and Wells Fargo

“All of the $5.3 billion year-on-year drop in aggregate net income came from a $7.3 billion swing in loan losses, from 2021’s write-backs to 2022’s fresh provisions. This could concern some, although loan losses remain low by the norms of the last couple of decades.

Source: Company accounts for Bank of America, Citigroup, JP Morgan Chase and Wells Fargo

Source: Company accounts for Barclays, HSBC, Lloyds, NatWest and Standard Chartered

“Rising interest rates, bond yields, credit spreads and mortgage costs are yet to manifest themselves into financial difficulties for borrowers and could at the same time be helping net interest margins at the lenders. The big American banks showed a further increase in loan book margins in the third quarter:

Source: Company accounts for Bank of America, Citigroup, JP Morgan Chase and Wells Fargo

“The UK banks have shown tentative signs of an upturn too and that could prove a powerful combination when added to accelerating loan book growth.

Source: Company accounts for Barclays, HSBC, Lloyds, NatWest and Standard Chartered

“Aggregate loans grew 7.6% year-on-year in Q2 across the FTSE 100 banks and the Big Four US banks showed combined loan growth of 7.1% in Q3 after a 6.6% year-on-year advance in Q1.

Source: Company accounts for Bank of America, Citigroup, JP Morgan Chase, Wells Fargo, Barclays, HSBC, Lloyds, NatWest and Standard Chartered

“However, loan provisions, any fresh conduct and litigation problems (after Barclays’ £1.3 billion fine from US regulators in Q2) and any weakness at investment banking operations (where they exist) could undo some of the good here and investors clearly remain sceptical about the UK’s biggest banks in particular.

“All of the FTSE 100 banks trade at a discount to book, or net asset, value per share. This is the market’s polite way of questioning the valuations of the assets on the banks’ balance sheets, or at least pointing out the danger that fresh, large loan provisions could lead to losses and a therefore a reduction in shareholders’ funds.

	2022E	Q2 2022	2022E	2022E
	P/E	Price/book	Dividend yield	Dividend cover
Standard Chartered	7.4 x	0.48 x	2.4%	5.59 x
Barclays	5.5 x	0.50 x	4.7%	3.86 x
HBSC	9.5 x	0.76 x	5.1%	2.07 x
Lloyds	6.6 x	0.78 x	5.2%	2.89 x
NatWest Group	7.2 x	0.89 x	12.4%*	1.12 x

Source: Company accounts, Marketscreener, consensus analysts’ forecasts, Refinitiv data. *Includes special dividends.

“Only Citigroup is so lowly rated in the USA.

	2022E	Q3 2022	2022E	2022E
	P/E	Price/book	Dividend yield	Dividend cover
Citigroup	6.1 x	0.54 x	4.7%	3.50 x
Wells Fargo	11.7 x	1.28 x	2.5%	3.42 x
Bank of America	10.5 x	1.59 x	2.6%	3.73 x
JP Morgan	10.0 x	1.66 x	3.5%	2.90 x

Source: Company accounts, Marketscreener, consensus analysts’ forecasts, Refinitiv data

“It may well be too soon for the UK banks to comment on the recent economic and political turmoil, but shareholders and analysts will look to any guidance given for the fourth quarter and full-year 2022 figures to see if events in Westminster are starting to have an impact on the real world.”