UK banks brace for difficult earnings season

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UK banks face concerns about bad debt, poor investment banking performance and uncertainty around Brexit as they prepare to release Q1 results.

Barclays, Lloyds, RBS and Standard Chartered are due to release their year-to-date earnings next week, followed by HSBC the week after.

They follow a weak earnings season in the US, by the likes of Bank of America, Goldman Sachs and Citibank, where over-exposure to the oil industry was blamed for poor performance.

Goldman Sachs chief financial officer Harvey Schwartz attributed the bulk of its 95 per cent drop in revenue from the Investing & Lending Division to energy-related write-downs.

Hargreaves Lansdown senior analyst Laith Khalaf says he does not expect UK banks to suffer from bad debts to the same degree.

However, he warned investors need to be alert for signs of deterioration in loan performance at HSBC and Standard Chartered, due to their big Asian exposure and high leverage in the Chinese economy.

Banks with large investment banking activity will suffer, Khalaf predicted, with Barclays already signalling this month that profits in the investment banking arm would not be as a high as last year.

This month, Japanese brokerage business Nomura announced it is shuttering its European equities business potentially costing 1,000 jobs in Europe and the US.

Brexit also adds uncertainty to the sector, with the UK financial services sector forecast to be one of the biggest losers if the country votes in June to leave the European Union.

A report by Woodford Investment Management analysing the economic outcomes of Brexit said the potential loss of passporting rights would be especially detrimental to the sector.

Regulatory claims have also been a big drain on sector profits, although Barclays, Lloyds and RBS have all increased provisions for PPI compensation costs.

Fund managers are split on sector, with Neil Woodford and Fundsmith’s Terry Smith both stating last week that they found the sector too complex to be a good investment.

Conversely, John Innes, portfolio manager of the RWC UK Focus Fund, says the sector’s fall from favour to a 30-year relative low means there is value to be found.

“Our preferred company is Lloyds Bank that has dealt with all the regulatory demands ahead of the other domestic banks, has recently returned to the dividend lists, but the share price has been depressed by the government selling down their stake,” Innes said.