There’s no shortage of banks of the FTSE. Right now, we’re in earnings season and several banks have delivered surprises, causing sizeable swings in share prices. So, where should I be putting my money?
Investors underwhelmed
Investors were underwhelmed by the results released by Barclays (LSE: BARC) and NatWest last week.
Barclays stock dropped 10% on Wednesday after missing estimates by just 2.8%. The bank increased its dividends — taking the forward yield to around 4.5% — but a £500m share buyback disappointed investors, especially as the firm isn’t exactly cash strapped.
The bank’s performance was dragged down by sizeable £1.22bn in impairment charges and a $361m fine from the US Securities and Exchange Commission. The company’s investment banking division also struggled amid an increasingly volatile environment and a depressed IPO backdrop.
NatWest shares slumped on Friday despite the bank reporting that annual profits had risen by more than a third. The net interest margin — the difference between lending and savings rates — rose 55 basis points to 2.85%. The bank also announced an £800m share buyback.
Steve Clayton, head of equity funds at Hargreaves Lansdown, suggested that investors might have expected more and that margins may have peaked. I’d add that the tone of the report was quite gloomy.
NatWest set aside nearly £340m last year to cover potential bad loans, and the bank added that it was acutely aware of the challenges customers were facing.
These results also pushed peer Lloyds (LSE: LLOY) downward. The bank is due to report next week.
Standard Chartered surges
Meanwhile, Standard Chartered missed estimates but jumped on a $1bn buyback announcement. The Asia, Africa and Middle East-focused bank reported pre-tax profit of $4.3bn. The figure was up 28% over 12 months, but came in some distance below the $4.73bn average analyst forecasts.
Higher than expected bad debt impairment — $838m — was one reason profit expectations were missed. The provision included $582m for expected bad loans in China’s real estate market, as well as state debt in Pakistan, Ghana and Sri Lanka.
But the bank had already been rising on takeover talk.
Which should I pick?
Naturally, I’ll keeping a close eye on Lloyds’ results next week and I’m intrigued to see if the lender has performed any better than its other UK-focused peers.
The bank, due to its funding composition, has higher interest rate sensitivity than its peers. Moreover, only a quarter of Barclays’ impairment charges were related to the UK. With that in mind, Lloyds — which is even more UK focused — could outperform its peers, and, as such, it’s my top pick. I could be wrong. But if I had the funds available, I’d buy more before the earnings report.
I’m also buying more Barclays stock. The bank only missed expectations by 2.8%, yet the stock fell 10%. I’d also suggest that the current interest rate tailwind may last for some time. The hedging strategy provides a smoothing impact for rate hikes while the stickiness of inflation suggests that higher rates could be here for the long run.
However, I’m actually bullish on all British banks right now. There are challenges, but I don’t think they deserve their below-average valuations.
