So far this week, we’ve had interim earnings from four of the five main London-listed banks, each of which has for one reason or another surprised on the upside and sent shares in their respective stocks rallying higher, with the sole exception of Standard Chartered, which added a further element of surprise in announcing a share issue.
Barclays
Barclays
and HSBC
kicked off the banks’ earnings season on Monday morning and set the tone
for the week. Both groups, neither of which succumbed to propping up its
balance sheet with taxpayers’ money earlier in the year, reported
profits for the first half of 2009. The subsequent increase in the two
firms’ share prices helped push the FTSE 100 index to its highest close
this year.
Barclays revealed soaring bad debt—an issue that proved to be something of a feature as the week progressed, which hampered its profit growth over the six months to end-June. But a particularly strong performance from its investment banking division helped push first-half profits up 8% year-on-year to £3 billion.
HSBC
On the same day, Asia-facing HSBC announced group profits of $3.7
billion (£2.2 billion)—a severe drop from the $8.3 billion announced
over the same period a year ago but still higher than the market had
expected as global banking and markets revenue more than doubled.
In stark contrast to most global banks, HSBC’s loan/deposit ratio was only 79.5% at the end of the first half “affording the bank substantial firepower to redeploy assets from securities into loans and take advantage of organic growth opportunities as we move through (and eventually out of) this nasty credit cycle” Morningstar associate director Matthew Warren commented.
Despite its ongoing run-off portfolio of $91.2 billion troubled US consumer loans, which continues to be a drag on the bank, Warren feels that overall HSBC is much better positioned to chase down opportunities than many of its global peers.
Standard Chartered
Standard Chartered, another UK-listed bank with a strong presence in
Asia, also topped consensus forecasts when it unveiled interim numbers
on Tuesday. Standard’s group net profit rose to $1.9 billion in the
first half of 2009 from $1.8 billion in the year-ago period, fuelled by
its wholesale banking division, which reported a 36% increase in pretax
operating profit. Taken alone, or even in conjunction with the group’s
10% interim dividend hike, these numbers should ordinarily have sent the
share price rising but the bank accompanied its figures with news of a
£1 billion fund-raising.
The funds will be used to take advantage of potential opportunities in emerging market, though management was quick to assure it had no intention of going on a “spending spree.” Still, while the decision to both raise equity and pay out more in dividends implied the group has confidence in both its business model and the economic prospects going forward, investors were spooked by the £1 billion book build and sold off the stock immediately following the announcements.
Lloyds Banking Group
Surprising as this move was from Standard, it was Lloyds
Banking Group that raised most eyebrows on Wednesday and triggered
the most dramatic of share price moves this week.
At first glance the bank’s pro forma loss of £4 billion—in stark contrast to the profits of its peers—looked rather horrific but in fact analysts had been predicting losses closer to £5 billion. By Morningstar’s calculations, taking away a £11.2 billion non-cash goodwill credit (arising from the difference between HBOS' fair value and the low price Lloyds paid for it), the firm lost £5.2 billion before taxes in the first half.
The numbers, however, were largely irrelevant given the magnitude of the HBOS acquisition, which closed in January of this year. Plus, it wasn’t the better-than-feared losses that sent the shares surging more than 14% higher during Wednesday’s trading session. Instead, it was management’s claim that impairments appear to have peaked that brought investors rushing to buy the stock.
The bank, which was forced to relinquish 43% of its shareholdings to the UK government mere weeks after the HBOS acquisition in order to secure a £17 billion bailout, today said it expects bad debts will dissipate from the second half of 2009 onwards. This assumption behind this assertion, however, is a tad dubious. Lloyds said impairments on retail and corporate assets would normally be expected to peak between one to two years after the trough in the recession, yet the jury are still out on whether we have yet passed this trough, let alone whether it was passed two years ago.
Royal Bank of Scotland
All eyes will be on Royal
Bank of Scotland on Friday to see if the other bank that signed up
for the government's asset protection scheme can outdo analyst
expectations and fuel the rising trend in financial sector valuations.
Improving sentiment
Overall, market reactions to each company’s results imply that it is
less about numbers and more about sentiment. After two years of
financial sector strife, investors appear keen to move on and focus on
building a more stable and profitable future. By no means are we saying
that the banking difficulties are over: there’s no financial fairy
godmother here to wave her wand, but it appears that the worst could be
over for several sector players.
To read more on each company's results and the subsequent market reactions, search our archive by company name by clicking here.
