It starts with the American banks: Bank of America, JP Morgan, and Goldman Sachs are all announcing third-quarter results this week. UK-listed banks will follow with HSBC (LSE: HSBA), NatWest and Lloyds presenting theirs towards the end of the month.
I’m keeping a close eye on American banks’ earnings reports and wondering if they can provide an insight into what comes next for UK bank stocks.
US bank stock opportunities
According to US reports, a few key threats and opportunities are emerging for banks across the pond.
Firstly, the opportunities. The US Federal Reserve is indicating that it expects to start raising interest rates sometime next year. This is usually good news for banks: when interest rates are higher, they can expand profit margins by charging steeper rates on loans.
Last week saw the first suggestion that interest rates could rise as soon as December in the UK, meaning UK-listed bank stocks could also benefit.
A US jobs report also came out last week, suggesting falling unemployment. This is good news for bank stocks: they tend to be cyclical, performing better as the economy grows.
US bank stock risks
And now to the risks. What concerns are on analysts’ radars as US banks announce their third-quarter earnings and what could these suggest to us about UK bank performance?
The cyclical nature of bank stocks leaves them vulnerable if economic recovery falters. This could again be a useful lesson for the UK. With high energy prices and fears about rising inflation, our macroeconomic recovery remains uncertain.
Rising costs at US banks seem to be a concern, driven by competition with fintech stocks for both workers and customers.
Will these costs prove difficult to rein in? Or will they prove a sound investment in the future, and increase competitiveness in the long run? At the moment, it is difficult to tell.
Any insights for UK banks?
So what insights do these third-quarter earnings reports give us into UK bank performance? With its strong investment banking presence, I am wondering if they might be most relevant to HSBC.
If third-quarter results follow the same pattern as their colleagues across the pond, we could see HSBC reporting increased costs.
HSBC’s second-quarter results revealed an increase in operating costs due to higher performance related pay, suggesting that it is also facing the same battle to retain staff. It also showed a 4% increase in technology spending, taking the total to $3bn over the first half of the year.
But with HSBC heavily exposed to China, I am reminding myself that there are more forces at play. Its share price fell to a five-year low in September as panic about Evergrande intensified, though it has since rallied, and is approaching its 12-month high of 455p.
Not a crystal ball
All in all, third-quarter reports from US banks aren’t a crystal ball. But they do provide some interesting insights into the forces impacting banks in the US. Higher wage costs, increased tech investments, and an uncertain economic recovery could all prove key themes as UK-listed banks announce earnings later in the month.