Based on US Q2 earnings, I’d watch this UK bank stock and avoid the rest

I discuss why I believe that recent US earnings point to a strong quarter for bank stocks Barclays and HSBC, but a bad one for Lloyds and RBS.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

This week, US banks have begun announcing their second-quarter earnings results. The largest of those banks have sent mixed signals. The important information for UK investors is the bumper profits in fixed income trading and the huge increase in loan loss provisions. Based on this data, I think that Barclays (LSE: BARC) is the bank stock that will perform the best when it releases its earnings. However, HSBC Holdings  (LSE: HSBA) should not be far behind. 

Loan loss provisions represent the money that banks have set aside in preparation for loans that they are expecting to be defaulted on or not paid in full. Due to the coronavirus, these provisions are going to be very high. In the US, JP Morgan Chase alone has set aside $34 billion this year.

In the UK, bank stocks are not as prepared for this huge loss. In the first quarter, UK banks set aside a lot less money than US competitors. Analysts expect the total UK domestic credit losses to be nearly £19 billion in 2020 alone, which is much higher than the current total provisions across the major banks. 

Barclays set aside £2.16 billion in the first quarter for loan losses, which was more than all its major competitors except HSBC. Every UK bank stock will have to report more provisions, but Barclays and HSBC should benefit from the larger sums that they have already set aside. 

Smaller and less leveraged retail banks will also offer an advantage this year, as they will have fewer loans outstanding. Out of the four major UK-listed bank stocks, HSBC and Barclays have the best loan to deposit ratio. This means that their losses should be smaller when compared to their held accounts. 

Barclays also has the largest fixed income trading team, which should help the bank profit handsomely this quarter. Meanwhile, HSBC will probably also perform well as its trading team is only slightly smaller. The other bank stocks have no trading teams of a notable size, which could cause them to have very negative results. 

Out of the UK listed bank stocks, I would avoid Lloyds Banking Group and Royal Bank of Scotland Group . They both set aside significantly less money in quarter one for bad loans, and they have much higher loan to deposit ratios and notably smaller trading teams. I believe that these banks will have results more in line with Wells Fargo, which fell 5% on its earnings release. 

I’d bet on Barclays to have the best performance out of all UK bank stocks, but HSBC should also have results in line with JP Morgan and Morgan Stanley. Either of these UK bank stocks could be worth an investment before results day, in my opinion (Barclays reports on the 29th of July and HSBC reports on the 3rd of August). 

It is important to note that both these bank stocks have other problems that could override any positive results. Other Fools have delved deeper into these problems, for HSBC, and Barclays. In the coming weeks, both bank stocks could also begin to price in US earnings. This makes any attempt to profit off of these results rather risky, but it could also be highly profitable.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Charles Heighton owns shares in Barclays. The Motley Fool UK has recommended Barclays, HSBC Holdings, and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »