Lloyds, Barclays, NatWest and HSBC shares set to struggle amid headwinds

The UK banking sector is braced for Brexit and continues to wrestle with the economic fallout from Covid-19, with lenders strengthening balance sheets to cope with a rise in bad debts, while low interest rates squeeze margins ever tighter.

The Bank of England (BoE) voted to leave interest rates unchanged at 0.1% in August. However, the BoE is already considering negative interest rates for the first time in its history due to the ongoing impact the coronavirus is having on the UK economy.

The central bank predicts unemployment will hit 7.5% by the end of the year, which would be relatively low considering how deeply the crisis has impacted the UK economy. It also forecasts credit losses of around £80 billion, though the actual figure could be much higher if localised lockdowns persist and a reopening of the economy is intermittently interrupted.

Unsurprisingly, with the myriad of headwinds UK banks face, the likes of Lloyds, Barclays, NatWest Group, formerly Royal Bank of Scotland (RBS) and HSBC are likely to see their share prices struggle throughout 2020 and beyond.

Lloyds likely to see shares trade sideways

Lloyds has traded within a tight range since the coronavirus pandemic took hold, with the stock struggling to break above 33p and finding support at 28p over the last four months.

Analysts from Berenberg believe Lloyds will continue this sideways trend, with the bank issuing a target price of 30p a share after reiterating its ‘hold’ rating in August.

‘The impact of the coronavirus pandemic in the first half of 2020 has been profound on the way we live our lives and on the global economy,’ outgoing Lloyds Group CEO Antonio Horta-Osorio said in its half-year results last month.

‘Although the outlook is uncertain, the Group’s financial strength and business model allow us to help Britain recover and play our part in returning our country to prosperity.’ he added.

Right now, Lloyds is on the hunt for its next CEO, with City insiders short-listing Vim Maru, head of Lloyds’ personal banking division, to take the top spot at the high street lender. However, many believe he faces stiff competition for the role from two colleagues, namely David Oldfield, head of Lloyds' business bank, and William Chalmers, the bank's newly appointed chief financial officer.

Whoever eventually takes the reigns at Lloyds has an uphill battle ahead of them, with the UK banking sector forced to navigate a long list of challenges that so far show no sign of petering out any time soon.

Lloyds closed at 28p per share on Monday, with the stock down 55% year-to-date.

Barclays’ investment bank supports profits, Bramson piles on pressure

Barclays’ share price has been hit hardest of all, with the stock kicking off the year at 185p before hitting a low 80p in early April at the height of the Covid-19 crisis.

The stock did launch a short-lived rebound, trading as high as 131p on 8 June, only for the lender to sees its shares tumble 19% in the weeks that followed, with investors concerned about a resurgence in Covid-19 cases and the economic impact of Brexit.

Despite a challenging first half (H1), Barclays corporate and investment unit shined with income up 31% year-on-year to £3.9 billion over the period.

The bank’s trading division also performed well, recording a 63% jump in revenues to £4.56 billion, driven by a flood of new traders looking to profit from increased volatility amid the pandemic.

Overall, Barclays highlighted just how challenging the market has become for UK lenders, with the bank recording a 66% fall in profits to £695 million, with that figure potentially being a lot worse without a strong performance from its investment unit.

Its strong performance, however, hasn’t deterred activist investor Edward Bramson pushing to have Barclays investment banking unit downsized.

Bramson, whose firm Sherborne Investors Management controls a 5.9% stake in Barclays, contends that by shrinking the size of the unit by 25%, it will unlock additional returns for shareholders, with the activist investor believing the recent trading surge will be short-lived.

‘In the real world, investors do not care very much about the trading business,’ Bramson wrote in a letter to shareholders.

Barclays Group CEO Jes Staley meanwhile has continued to expand rather than shrink the size of the investment banking division, with it generating a return on equity of 9.6% in Q2 2020. And while that figure shouldn’t be scoffed at, it falls short of returns generated by rivals like Goldman Sachs and Credit Suisse, which generated returns of more than 17%.

Barclays closed at 106p per share on Monday, with the stock down 42% year-to-date.

NatWest Group prepares to help rebuild after Covid-19

NatWest Group, formerly RBS had a disappointing first half of trading, with the bank recording a £770 million pre-tax operating loss in H1 2020, with the lender bracing for a rise in bad debts and increasing uncertainty.

‘Our performance in the first half of the year has been significantly impacted by the challenges and uncertainty our economy continues to face as a result of Covid-19,’ RBS CEO Alison Rose said.

‘However, NatWest Group has a robust capital position, underpinned by a resilient, capital generative and well diversified business.’

For the remainder of 2020, the lender hopes to achieve a £250 million cost reduction. RBS also expects full-year impairment charges to be within a range of £3.5 billion to £4.5 billion in anticipation of a significant rise in the number of customers struggling to repay loans.

But the bank admitted in it half-year results last month that ‘the impacts of Covid-19 on the economy and the mitigating benefits of government support schemes remain uncertain and could result in changes to our financial results in upcoming periods’.

RBS closed at 114p per share on Monday, with the stock 53% year-to-date.

HSBC profits hit hard by rising debts, Goldman reiterates ‘buy’ rating

The world’s local bank, like its peers, saw profits plummet at the hands of Covid-19, as rising bad debts forced the lender to set aside even more capital and increase cost-cuttings measures.

In real terms, that meant HSBC increased provisions for bad loans by $3.8 billion and brought forward plans to cut around 35,000 jobs across its various operations.

‘Give the deterioration in consensus economic forecasts and actual loss experience’ during Q2 2020, the lender said that it expects full-year loan losses to be between $8 billion - $13billion.

Pre-tax profits at the Asian-Anglo bank meanwhile fell to $4.3 billion in H1 2020, down from $12.4 billion recorded in the same period a year prior.

Despite a disappointing set of results and major hurdles ahead for HSBC, analysts at Goldman Sachs remain optimistic about the bank’s share price trajectory.

The US-based investment bank reiterated its ‘buy’ rating for HSBC and issued a target price of 525p per share, implying a potential upside for the stock of 58%.

Goldman Sach’s upbeat outlook is likely due to the resilience of its Asian operations and global markets unit which have delivered strong growth.

But most analysts are far more cautious in their outlook for HSBC, with the bank’s own CEO admitting that there are many challenges ahead.

‘Current tensions between China and the US inevitably create challenging situations for an organisation with HSBC’s footprint,’ HSBC CEO Noel Quinn said.

‘We will face any political challenges that arise with a focus on the long-term needs of our customers and the best interests of our investors.’

HSBC closed 331p on Monday, with the stock down 44% year-to-date.

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