UK Banks ~ It's all down hill on the numbers

UK banks – the story so far
Richard Hunter, head of UK equities, Hargreaves Lansdown
August 04 2008
With more than half of the UK banks' half-year reporting season now completed, the overall numbers have not made for good reading.

Admittedly, much of the bad news (which has subsequently been borne out) had been largely factored into share prices which have, on the whole, taken a mauling over the last year. Nonetheless, with eyes particularly focused on the likes of Barclays and RBS, it would appear that this season could prove to be one to forget.

Banking woes
The reports were kicked off when Lloyds TSB reported a 70% dip in half-year profits and as such these numbers represented a cautious opening, with profits largely pegged back by a hit in investment writedowns.

Whilst the group's exposure to the US subprime fallout is negligible compared to some of its peers, it nonetheless remains exposed to the UK consumer and the level of defaults is expected to increase, albeit on a manageable basis. It appears that Lloyds did not totally discount an overseas acquisition to achieve greater diversification, even though the reported German approach recently came to nothing.

Lloyds has not, of course, been totally immune to the wider credit crisis and the shares have dipped some 40% over the last year. Nonetheless, concerns regarding the sustainability of the dividend have been firmly quashed, with the clear attractions of a near 12% dividend yield remaining intact. On balance, the general market view towards the shares remains neutral for the time being.

HBOS followed, and rather strangely the current trend in global banking stocks diametrically to oppose the news continued again with the company posting a 51% decline in profits whilst seeing an 8% spike in its share price in early trade.

Stocks rise as profits fall
There was a Merrill Lynch type reaction to the numbers, in that there were no nasty surprises and therefore another contribution to the beginning of the end of the credit crunch may have been made. The actual profit figures were slightly ahead of expectations and the recent rights issue will help shore up the capital ratio to one of the healthiest in Europe, according to the bank's management.

Concerns still linger in the form of the group's exposure to the UK environment and, in particular, the buy-to-let market in which Halifax is a major player. Further disposals of assets have not been ruled out if the price is right, and if the economic landscape deteriorates sufficiently. Despite a 71% drop in the share price over the last year, the existence of better value in the sector leaves the shares as a weak hold in market consensus terms.

The next large bank to report was HSBC, whose results were something of a mixed bag. Some further hefty writedowns continued to negate the progress being made in certain parts of HSBC's global portfolio.

Whilst there were resilient performances in Asia in particular, even growth here is likely to lose a little momentum in the nearer term. This very diversification has been one of the reasons for the bank's relatively strong share price performance, with the shares having posted an 8% gain in the last six months during a period when the vast majority of HSBC's peers have been suffering.

The yield remains supportive at around 5.5% and the rumoured renegotiation on the Korean Exchange Bank stake is further proof of the bank's growth ambitions. Nonetheless, the US situation is proving to be an ongoing drag on profits and, with an economic slowdown in train in many of the developed economies, HSBC has not proved to be the bank to lift some of the gloom on this UK interim reporting season. The market view of the shares remains no more than a hold.

For Barclays and RBS - the latter of which is largely expected actually to post a loss for the period - there will be a late chance to turn sentiment around with some robust numbers. However, if the performance of their peers is anything to go by, this may be asking just a little too much yet.