UK bank wrap up: winners and losers

Lloyds Banking Group shares lose ground despite higher returns

Lloyds cheered solid growth in 2017, even if the 24% lift in reported pre-tax profit to £5.3 billion missed consensus expectations as it booked £600 million of further provisions in the final quarter for mis-selling payment protection insurance. Net income was up 5% to £17.5 billion as revenue rose and its net interest margin improved to 2.86% from 2.71%.

PPI has plagued Lloyds since 2006, and the additional provision (which took the total for the year to £1.7 billion from £1 billion in 2016) followed the Financial Conduct Authority’s (FCA) advertising campaign highlighting the deadline for PPI claims in August 2019, when Lloyds and others will finally be able to draw a line under the entire saga – which has cost the bank about £18 billion so far.

Shareholders were sweetened as the UK bank returned £3.2 billion to shareholders, lifting its total dividend by 20% to 3.05p and launching a £1 billion share buyback worth an additional 1.4p per share. Its pro-forma CET1 ratio after the payouts was 13.9%, up from 13%.

Chief executive, Antonio Horta-Osorio, continued to demonstrate his cost-cutting abilities, having cut 30,000 jobs since 2011, as the bank’s industry-leading cost to income ratio improved to 46.8% from 48.7%.  

2017 was a significant year for Lloyds. The UK government finally sold-off the last of its shares following one of the largest bailouts of the 2008 financial crisis, and Lloyds also made its first major acquisition since the crash after buying MBNA’s prime credit card business, as well as Zurich’s UK workplace pensions and savings business.

Moving forward, the CEO unveiled a new three-year plan that will see Lloyds invest £3 billion to ‘transform the group for success in a digital world’ – about 40% more than invested in the previous strategy. The CEO has already cut about a third of branches since joining the bank as customers continue to turn to online banking.

The bank is aiming to procure one million new pension customers under the plan, aligned with the Zurich deal last year, while increasing net lending to start-ups, small and medium-sized enterprises (SMEs) and mid-sized businesses.

The digital transformation will target 70% of the bank’s cost base. The three-year plan should lead to ‘strong statutory profit growth’, a reduction in operating costs below £8 billion in 2020 (from £8.14 billion in 2017), and a cost to income ratio in the ‘low 40s’ at the end of 2020. This will lead to ‘strong and superior returns’ on a higher CET1 capital base and improved capital generation.

In the nearer term, Lloyds issued a positive outlook for 2018, stating its net interest margin should edge up to about 2.9%, that its cost to income ratio will 'improve further', and for capital generation to be between 170 to 200 basis points, compared to 245 in 2017.

Lloyds also added it expects to deliver an improved return on tangible equity of 14% to 15% from 2019 onwards (after rising to 15.6% in 2017 from 14.1%) on a higher CET1 capital base of 13%, plus a management buffer of around 1%.

Lloyds shares lost ground following the numbers, remaining within the broader range that has prevailed since the beginning of 2017. Possible support comes at 67.0p and 61.8p, with the latter marking the bottom end of the range. A push higher would need to clear 71.0p to target 73.8p.

Barclays shares shrug off huge loss

Barclays shareholders were won over with a bright outlook, a promise to more than double its dividend next year, and hints that further returns could be dished out through buybacks in the future.

Legacy issues caused Barclays to sink to a £1.92 billion loss from a £1.62 billion profit. That was after making a £2.5 billion loss from selling down its stake in Barclays Africa Group, £1.2 billion of litigation costs and PPI charges of £700 million. The recent corporate tax shake-up in the US incurred one-off costs of £900 million.

Excluding those charges, pre-tax profit rose to £3.5 billion from £3.2 billion despite revenue sliding 2% as return on tangible equity climbed to 5.6% from 3.6%. Barclays expects return on tangible equity (RoTE) to be above 9.0% in 2019, excluding any further one-off charges, rising to over 10.0% in 2020.

That target is based on the bank’s target CET1 ratio of 13.0%. The ratio rose to 13.3% in 2017 from 12.4% the year before. 

As well as the litigation and other charges, operating costs totalled £14.2 billion in the year as its cost-to-income ratio fell to 73% from 76%. Costs are due to drop to between £13.6 billion to £13.9 billion in 2019.

Having cut its dividend by more than half two years ago, Barclays kept its payout for 2017 flat at 3p per share, but promised to restore the 6.5p dividend from 2018 while making it clear share buybacks are coming in the near future.

While legacy issues continue to hang over the business, Barclays has some serious legal battles ahead. The UK Serious Fraud Office charged the bank after questions were raised about funds it raised from Qatar in 2008, and the US is suing the bank for misleading investors of the quality of loans used to back financial productions from 2005 to 2007.

Chief Executive Jes Staley is also under investigation himself, as the FCA looks into how he handled a whistleblower who raised concerns about recruitment of a senior executive.

Barclays’ shares were boosted by the results, moving back to 212p, the January high. From here, 219p and then 240p come into play. Having broken out of their 2017 downtrend in November, a push higher looks likely, but if it fails then 194p and 176p are possible support.

Royal Bank of Scotland Group shares react to symbolic profit

RBS surprised by returning to profit sooner than expected, ten years after the bank was one of the worst hit by the financial crisis. The bottom-line profit of £752 million signalled a milestone for the bank, which was expected to report a loss of £592 million. In 2016, the loss stood at a staggering £6.96 billion.

The unexpected profit was caused, however, by expected conduct charges from settling a long-running legal dispute over selling financial products linked to risky mortgages in the US not materialising.

RBS did book £764 million of extra conduct and litigation provisions in the final quarter, broken down into £442 million for ongoing proceedings in the US, and £175 million for PPI - much lower than the likes of Lloyds booked.

RBS, still majority-owned by the UK taxpayer, said its net interest margin dipped to 2.13% from 2.18% while adjusted RoTE of 8.8% was much improved from only 1.6%.

The CET1 ratio of 15.9% rose from 15.5% while its cost-to-income ratio fell to 79% from 129%. RBS retained its medium-term target to have RoTE of above 12% by 2020 with a cost ratio below 50%.

However, RBS said in the near-to-medium term it expects to keep CET1 ratio over its 13% target because of uncertainty spawning from the likes of its ongoing legal cases with the US Department of Justice and pension contributions, as well as increased volatility - and the collective impact of all of that on bank stress tests.

Conduct and litigation costs could see 'substantial additional charges and costs' recognised 'in the coming quarters', RBS said, and impairments are 'expected to be more volatile.'

RBS plans to accelerate investment over the next two years, and said it will incur £2.5 billion of restructuring costs over 2018 and 2019, £1.2 billion more than previously guided. In a similar move to Lloyds, RBS is looking to invest in digitisation and automation.

Operating costs, which fell much faster than expected in 2017 to £10.4 billion from £16.2 billion, will continue to fall over the coming years, but at a slower rate as a result. 

While no dividend was expected, RBS said it plans to restart distributing capital to shareholders when it can, stating a resolution with the US Department of Justice would be ‘a key milestone to enable this’.

What is worrying for RBS shares in the wake of the results is the loss of the rising trendline from the 2016 lows. This had served the shares well for months, but a gap lower took them back to 270p and below the rising trend. A recovery above 280p would be a positive development, and would suggest a move back to 300p. However, further declines bring 260p and then 240p into view.