The UK's two domestically-focused banks, Lloyds and RBS, have both published interim results recently, as have globally-diversified Barclays and HSBC. The fifth bank listed on the LSE to unveil earnings this season will be Standard Chartered, which generates the majority of its revenues in Asia, Africa and the Middle East, on August 6th.
To help you decipher which of these financials' earnings will impact your investment decisions, Morningstar analysts provide their own views on each copmany's announcements and share price moves.
BarclaysBarclays' attributable earnings of £1,145 million (7p per common share) for the first half of 2014 represented a mere 4.2% return on equity but were the bank's best result since 2011. We're pleased with the bank's increasing capital strength, moderate credit costs, and cost reductions in its core businesses, which we think will help the bank meet our projection that it can earn a 13% return on equity in the medium term. Still, we're disappointed by news that Barclays took another £900 million in provisions for the mis-selling of PPI insurance and that US authorities have extended until June 2015 their investigation into whether Barclays rigged Libor rates. These charges underscore our opinion that regulatory and litigation costs will be a material headwind for Barclays, like most global banks, in the years ahead. We plan to maintain our 320 pence fair value estimate for the no-moat bank.
HSBC's underlying profit before tax of $12.6 billion was down 3.5% from the year-ago half on a 2.2% drop in underlying revenue and a 4.4% increase in costs. On a reported basis, the 12.3% year-over-year drop in pretax profit was driven by the nonrecurrence of unusual items, notably a $1.1 billion gain on the de-recognition of Industrial Bank that benefited HSBC's earnings in 2013. HSBC's profits for the first half, which reflect low volatility and client activity in markets, offset by sharply lower loan losses, are in line with our expectations. We plan to maintain our 700 pence fair value estimate for the narrow moat bank.
Lloyds' reported earnings of £594 million (0.80p per share) for the first half were a disappointment, given the strengthening UK economy and recent better trends at the narrow-moat bank. Once again, shareholders were forced to absorb substantial costs related to past misbehaviour by Lloyds' bankers. This time it was £226 million of Libor and BBA interest rate settlements, previously announced, and £600 million of additional charges for the misselling of payment protection insurance. While this reinforces our opinion that Lloyds, like most large banks, is likely to be reaping the seeds of its past misbehavior for some time, the bank's underlying trends show that it is well on track to meet our long-term projections, and we plan to maintain our 94 pence fair value estimate.
There was little new in RBS's formal earnings release, which followed the bank's surprisingly good pre-announcement earlier this week. The more detailed results show that RBS is on the right track--capital is becoming stronger and credit losses are abating--but we reinforce our view that investors should not expect a repeat of the strong second-quarter results. When we reviewed the bank's early earnings announcement, we'd said that we were interested to see how provisions for the mis-selling of Payment Protection Insurance (PPI) stacked up against competitors. We were therefore somewhat disappointed to see that RBS's provisions cover only seven months of charges, compared to about a year of coverage at Lloyds (which includes Lloyd's £600 million additional second-quarter provision). We think RBS is near the end of this unpleasant saga, but wouldn't be surprised to see a smaller top up in the next quarter or two. We are increasing our EPS estimates for 2014 and 2015 to account for write-backs of credit provisions but do not plan to change our 400 pence fair value estimate for the narrow-moat bank.
As guided in late July, Standard Chartered's pretax income for the first half of 2014 was down 20% from the year-ago period, excluding own-debt accounting charges and the year-ago $1 billion goodwill impairment in Korea. On a reported basis, earnings attributable to common shareholders of $2,310 million were down 8% from the year-ago period. While much is being made of the disappointing drop in profits, we also see signs of resilience in the first half's results—return on equity was 9.8%, only a bit below the 11% cost of equity we assign to the bank, and the bank's end-point CET1 ratio hit 10.7%, above the level seen at most global banks. We plan to maintain our 1,630p fair value estimate and narrow moat rating.
