The return to dividend payments for Royal Bank of Scotland (RBS) is being heralded as some kind of great development for the bank, which continues to live in the shadow of the great financial crisis. In one sense, it is an improvement. Any suggestion that long-suffering shareholders may receive some income for their pains is welcome, but with net revenues down by almost 20% in its capital markets business, the shares do not look particularly attractive. Only by stripping out the fine paid to the US Department of Justice did the bank even manage to keep first-half profits from flopping into the red. RBS, it seems, is still very far from being ‘out of the woods’.
Lloyds, always (perhaps unfairly) thought of in the same breath as RBS, did better, with a 23% rise in first-half profits. But of course, unlike RBS, it is primarily a UK-focused business. Thus, with Brexit hanging over the British economy like the Sword of Damocles, sentiment towards the shares will undoubtedly be affected. And there may be a bigger problem than Brexit lurking for the Black Horse bank. The loan impairment charge, an indication that many loans have turned sour, rose 67% in the period, from 12 basis points to 20. This comes as the Bank of England (BoE) raises rates and causes repayments on loans to rise. This is something to watch for the months and years ahead, particularly if the UK economy begins to weaken.
Barclays' shares continue to underperform the broader FTSE financial sector, an indication of how much more work there is to do at the firm. Equity trading and investment banking supported performance in the most recent quarter, and a drop in bad loans and misconduct charges also improved the outlook. But, compared to the likes of JPMorgan and others, Barclays remains firmly in recovery mode. Return on equity is still low, an indication that there is much more work to be done.
HSBC has seen an increase in costs as it strives to grow its presence in Asia. The bank is determined to close the gap between costs and revenues, which continues to grow. A 4.6% rise in pre-tax profit would seem to suggest that the bank is achieving this, but much of the growth has been thanks to the Hong Kong property market, not one noted for its cheapness. If trade wars feed into economic weakness, prime real estate spots like Hong Kong will come under pressure. Still, as a play on growth in Asia, HSBC seems to have much to recommend it.
Of the big four UK banks, HSBC still seems to have the most to recommend it in performance terms. Its pivot to Asia reduces dependence on mature markets in Europe, something that Lloyds is learning about. Meanwhile, RBS, despite the prospect of dividends, looks to be a stock for traders rather than investors. Brexit and political turmoil cloud the outlook, making a judicious approach to UK bank stocks the best way at present of approaching the sector.
