Atlantic Markets - MoneyWeek Banking Sector Review
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

         2020 BANKING SECTOR REVIEW

 

 

Just as the banking sector seemed to have finally recovered from the 2009 “great depression” subprime lows, Covid-19 surfaced to send the sector back into a tailspin. The US stocks have largely recovered from the heavy market sell-off experienced earlier in the year, however the banking sector, the European banking sector, has failed to keep pace with the broader market strength. The majority of the major UK banks are back towards their 2020 lows, and many are even around the lows posted back in 2009.

 

As we head into the Autumn and the Winter which will go down in history as the winter of Covid-19, it seems prudent to take an in-depth look at the banking sector to see if these seemingly bargain basement levels are attractive, or if more pain is seen ahead.

 

 

 

Barclays Plc (BARC)

Net Asset Value (exc intangibles) 325.08

Discount to NAV (as of 22nd Sept 94p) = 231.08

 

 

Barclays really needs very little in the way of an introduction, they are a British multinational investment bank and financial services company, headquartered in London. Apart from investment banking, Barclays is organised into four core businesses: personal banking, corporate banking, wealth management, and investment management. Barclays was originally a goldsmith banking business established in the City of London in 1690. James Barclay became a partner in the business in 1736. In 1896, several banks in London and the English provinces, including Backhouse's Bank and Gurney's Bank, united as a joint-stock bank under the name Barclays and Co. Over the following decades, Barclays expanded to become a nationwide bank. In 1967, Barclays deployed the world's first cash dispenser.

 

 One thing that sets Barclays apart from the UK’s other big four banks is its large and sometimes successful investment bank. It is certainly the investment banking arm that came to the rescue in the recent set of figures.

 

 

 Investment banking 

 

 

Investment banking is generally seen as the riskier but more lucrative cousin of retail banking. Instead of mortgages and current accounts, it involves things like advice on takeovers, raising debt and equity for large corporations and trading of bonds and shares. Barclays is the only British bank to make serious headway in investment banking, boosted by its opportunistic buy of Lehman Brothers core business during the financial crisis. This gave Barclays a leg up to compete with Wall Street’s titans such as Goldman Sachs and Morgan Stanley.

 

 

 

Becoming a major player has not come easy or cheap, so it’s understandable why Barclays is reluctant to part with one of its best assets, even if it is unfashionable. While investment banking adds extra volatility to earnings it can also generate mega-money in good times – on a scale that retail banking can never do and those worried about another financial crisis should note that Barclays has been the first of the major British banks to successfully ring-fence its UK retail operations.

 

We’ve noted that Barclays is now taking a leaf out of Lloyd’s book and continuously using the words simple and straightforward. I don’t think Barclays will ever be a simple as Lloyds, but nor should it try to be. It’s got a better spread of assets and products. You can’t be simple and diversified at the same time.

 

 

Fundamental’s

 

 

 

31.12.15(£m)

31.12.16(£m)

31.12.17(£m)

31.12.18(£m)

31.12.19(£m)

PE Ratio

-

24.03

58.11

16.01

12.56

PEG

-

-

-

-

0.24

Earnings per Share Growth

-

-

-

-

52.13%

Dividend Cover

-0.29

3.1

1.17

1.45

1.59

Revenue Per Share

190.59p

164.12p

159.19p

168.48p

175.08p

Pre-Tax Profit per Share

12.14p

18.69p

20.42p

20.06p

24.98p

Operating Margin

-

-

-

-

-

Return on Capital Employed

-

-

-

-

-

Dividend Yield

2.97%

1.34%

1.47%

4.32%

5.01%

Dividend per Share Growth

-0.18%

-29.12%

-32.98%

49.59%

53.09%

Net Asset Value per Share

306.99p

336.89p

328.58p

318.58p

325.08p

 

 

First Half 2020 Figures

 

 

Barclays reported a 66% drop in profits for the first six months of the year, impacted by declining business due to the current pandemic. Profits attributable to shareholders dropped to £695mn in the first half down from £2bn last year. Barclays has also set aside £3.7bn in anticipation of bad loans related to the crisis, with a £1.6bn charge in the second quarter alone.

 

Barclays trading division performed relatively better as it posted a 60% jump in trading revenues in foreign-exchange, rates, and credit trading.

 

The recent pandemic has clearly impacted and pushed the bank to set aside funds to cover the expected bad loan fallout. Barclays warned that despite contingency plans to deal with COVID-19, unavailability of staff or failure of third-parties to supply services could lead to "significant customer detriment, costs to reimburse losses incurred by the Barclays Bank UK Group's customers, potential litigation costs reputational damage."

 

 

Summary

 

 

Barclays continues to struggle to grow earnings in the low interest rate environment, and it remains at a deep discount to net assets as investors remain concerned about the long-term outlook. One advantage of the recent share price falls is that the dividend yield now looks very attractive. The concern remains how much further capital erosion could occur in the medium term. We are not seeing much short-term buying interest in Barclays yet, although at such a discount you would expect some buying interest to appear at some stage, surely? However, it is hard to get too excited in a story like this and we would only be comfortable buying Barclays for the very long term, but even over these timescales, better opportunities exist in the global financial sector. Still one to avoid for now.

 

 

Lloyds Banking Group (LLOY)

Net Asset Value (exc intangibles) 51.93p

Discount to NAV (as of 22nd Sept 24.62p) = 27.31p

 

 

Lloyds was initially founded in 1695 by the Parliament of Scotland of the Bank of Scotland, which is the second oldest bank in the United Kingdom. The Group's headquarters is located at 25 Gresham Street in the City of London  Lloyds Banking Group's activities are organised into: Retail Banking (including Mortgages and Sole Traders); Commercial; Life, Pensions & Insurance; and Wealth & International. Lloyds' has extensive overseas operations in the US, Europe, the Middle East and Asia. Following the takeover, the Group stopped using the name HBOS publicly. The Halifax brand, products and pricing were discontinued in Scotland until it was re-established in 2013. The Halifax and Lloyds Bank brands are used in England and Wales and the Bank of Scotland and Halifax brand is used in Scotland, each offering different products and pricing. Lloyds Banking

 

 

Back to boring 

 

 

Lloyds have received a lot of praise recent years, mainly due to a return to boring comfortable banking. Lloyds is back to doing what it does best – current accounts, mortgages, personal and business loans, life insurance…sound dull? Thank goodness.

 

Fundamentals

 

 

 

31.12.15(£m)

31.12.16(£m)

31.12.17(£m)

31.12.18(£m)

31.12.19(£m)

PE Ratio

91.34

26.05

15.36

9.43

17.86

PEG

-1.73

0.13

0.18

0.38

-0.49

Earnings per Share Growth

-52.94%

199.18%

83.84%

25.00%

-36.36%

Dividend Cover

0.29

0.79

1.44

1.71

1.04

Revenue Per Share

43.34p

67.64p

56.77p

36.89p

71.37p

Pre-Tax Profit per Share

1.37p

5.44p

7.36p

8.32p

6.22p

Operating Margin

-

-

-

-

-

Return on Capital Employed

-

-

-

-

-

Dividend Yield

3.76%

4.88%

4.51%

6.19%

5.39%

Dividend per Share Growth

161.72%

61.21%

-18.84%

-8.99%

6.94%

Net Asset Value per Share (exc. Intangibles)

53.38p

54.98p

54.08p

55.51p

51.93p

 

 

First Half 2020 Figures

 

 

The bank said it had set aside an extra £2.4bn to cover an expected rise in the number of credit cards, mortgages, and loans going bad as a result of the crisis, way more than the general analysts expectation of £1.5bn.

 

“We have seen the UK economy deteriorate since the first quarter,” chief executive António Horta-Osório said on a call with journalists.

 

Lloyds has now set aside £3.8bn in the last six months. The bank said it would likely end up setting aside as much as £5.5bn by the end of the year. The cash set aside weighed on Lloyds’ overall performance and pushed it to a half-year and quarterly loss. The bank made a pre-tax loss of £602m in the first six months of 2020 and lost £676m in the second quarter alone. Income declined 16% to £7.4bn in the first six months of 2020, which was in-line with forecasts. Lloyds blamed a squeeze on interest rates. Return on tangible equity, a key measure of bank performance, fell to just 0.1%, compared with 11.5% last year.

 

 

Summary

 

 

Last year Lloyds detailed that Net Income was impacted from both lower net interest margins and reduced activity from commercial banking, in the reduced economic activity seen since Covid-19, and the expectation that this will continue through the winter it is hard to see income for Lloyds appreciating a great deal in the coming months, as a result it is difficult to see a compelling reason to buy the stock here. It is at these depressed levels for a reason, its core business is depressed. As ever a long-term hold will result in a profitable position so some will be tempted to buy here. But clearly that is not enough, the real question is what will Lloyds return be over 5-10 years versus a company with much stronger fundamentals? Not fantastic has to be the honest answer, so Lloyds also is one to avoid here for the long term as there are so many better long-term plays out there.

 

 

 

 

 

 

NatWest Group (NWG) ( Formerly Royal Bank of Scotland)

Net Asset Value (exc intangibles) 305.70p

Discount to NAV (as of 22nd Sept@97p) = 208p

 

 

The Royal Bank of Scotland commonly abbreviated as RBS was established in 1724 and is one of the retail banking subsidiaries of The Royal Bank of Scotland Group plc, together with NatWest and Ulster Bank. The bank has now moved to rebrand and use the Natwest name to try and finally shake off the bad name and legacies relating to the financial crisis of 2009. The  group has around 700 branches, mainly in Scotland, though there are branches in many larger towns and cities throughout England and Wales. Both the bank and its parent, The Royal Bank of Scotland Group, are completely separate from the fellow Edinburgh-based bank, the Bank of Scotland, which pre-dates The Royal Bank of Scotland by 32 years.

 

 

Fundamentals

 

 

 

31.12.15(£m)

31.12.16(£m)

31.12.17(£m)

31.12.18(£m)

31.12.19(£m)

PE Ratio

-

-

3.17

1.48

0.77

PEG

-

-

-

0.01

0.01

Earnings per Share Growth

-

-

-

114.29%

92.59%

Dividend Cover

-

-

-

-

1.18

Revenue Per Share

146.67p

136.00p

135.36p

140.36p

152.72p

Pre-Tax Profit per Share

-23.47p

-34.82p

18.87p

28.31p

35.07p

Operating Margin

-

-

-

-

-

Return on Capital Employed

-

-

-

-

-

Dividend Yield

-

-

-

-

110.06%

Dividend per Share Growth

-

-

-

-

-

Net Asset Value per Share (exc. Intangibles)

403.40p

356.33p

349.26p

324.68p

305.70p

 

 

First Half 2020 Figures

 

 

NatWest posted a £1.3bn loss in the second quarter as it followed suit and set aside £2.1bn to cover bad debts caused by the coronavirus crisis. The preparations for a further downturn wiped out profits.

 

NatWest Group’s chairman, Howard Davies, said: “It’s always disappointing to report a loss but as you’ve seen from the banks that have already reported, our first-half numbers show the impact the pandemic is having on our profitability.”

 

NatWest said the impairment costs, which brings total provisions so far this year to £2.9bn “reflected the deterioration of the economic outlook”. Full-year loan loss charges are expected to total £3.5bn-£4.5bn. They also warned they could be forced to take a write down if the economic blow was larger than expected. “The impacts of Covid-19 on the economy and the mitigating benefits of government support schemes remain uncertain and could result in changes to our financial results in upcoming periods, including the possible impairment of goodwill.”

The group said it was still aiming to cut £250m of costs by the end of the year,

 

 

The chief executive, Alison Rose, said the lender was still in a strong financial position: “Our performance in the first half of the year has been significantly impacted by the challenges and uncertainty our economy continues to face as a result of Covid-19. However, NatWest Group has a robust capital position, underpinned by a resilient, capital-generative and well-diversified business.”

 

 

Summary

 

 

The share price will always gather attention especially after such a pullback however in the annals of Technical Analysis NatWest Group, formerly RBS, has the dubious honour of having one of the most horrific monthly price charts ever created. The stock was trading at £70 a share back in 2007 and was a major constituent of the FTSE 100. Currently it is languishing under £1.00 a share. It is also one of the few financial stocks in the world currently trading under its 2009 lows, in fact trading well under these levels at the moment. So there is a technical term for NWG, “it is a dog”, simple as that, its performance has been so awful it even had to take the step of dropping its RBS name, that had been around for some 100 hundred years, as it had been so badly tarnished, and was forced to rebrand under the lesser NatWest brand. Sometimes you just must see it for what it is, and this stock is clearly one to avoid, at virtually no price would we be comfortable recommending buying this for the long term here. Avoid for the short term, avoid for the medium term, and avoid for the long term.

 

 

Standard Chartered (STAN)

Net Asset Value (exc intangibles) $1,412.08/1,103p

Discount to NAV (as of 22nd Sept@347p) = 756

 

 

Standard Chartered PLC is a British multinational banking and financial services company headquartered in London, England. It operates a network of more than 1,200 branches and outlets across more than 70 countries and employs around 87,000 people. It is a universal bank with operations in consumer, corporate and institutional banking, and treasury services. Despite its UK base, it does not conduct retail banking in the UK, and around 90% of its profits come from Asia, Africa and the Middle East.

 

 The business origins stem from the merger of the Chartered Bank of India, Australia and China.

 

 

 Listed in London and Hong Kong and with a stronger global presence you would be forgiven for thinking that growth and upside would be stronger.  The Brexit uncertainty however weighs on all UK banks regardless of their overall operations.  In previous figures Standard chartered have pointed towards increased US interest rates boosting revenue, but with rates being dropped in the US this is now being stunted as well.  They have suffered a couple of high-profile legal cases over the last 12 months, from fixing the RAND to the investigation into the potential breach of sanctions for Iran controlled entities.  Both faces potentially large fines, which could easily scupper the banks plans to return capital to investors.  We feel there is a high probability of this being more detailed in the figures and having the potential to overshadow any positives.

 

 

Standard also said that "recent political protests have additionally elevated the risk" in Hong Kong, referring to a wave of protests in the financial hub against a now suspended extradition bill that would see people sent to mainland China for trial in Communist Party controlled courts.

 

"The Hong Kong situation obviously is more fragile at this particular point in time," Halford said. While the bank has not seen any direct impact of that on its business, sentiment has been impacted a little bit, he added.

 

 

Fundamentals

 

 

 

31.12.15($m)

31.12.16($m)

31.12.17($m)

31.12.18($m)

31.12.19($m)

PE Ratio

-

-

44.12

41.71

16.5

PEG

-

-

-

-2.04

0.08

Earnings per Share Growth

-

-

-

-20.43%

204.81%

Dividend Cover

-6.71

-

2.14

0.89

2.59

Revenue Per Share

824.27¢

596.33¢

649.16¢

727.10¢

773.59¢

Pre-Tax Profit per Share

-66.78¢

13.52¢

65.20¢

69.78¢

104.82¢

Operating Margin

-

-

-

-

-

Return on Capital Employed

-

-

-

-

-

Dividend Yield

1.64%

-

1.06%

2.69%

2.34%

Dividend per Share Growth

-84.07%

-

-

90.91%

4.76%

Net Asset Value per Share (exc. Intangibles)

1,330.55¢

1,330.70¢

1,411.00¢

1,362.01¢

1,412.08¢

 

 

First Half 2020 Figures

 

 

The company registered profits of $549mn in the second quarter of 2020, down 19% from the result of $678mn reported a year earlier. Net interest income for the second quarter of 2020 was $1.66bn, down 15% from $1.942bn registered a year earlier. Other income was $2.060bn, up 6% from the second quarter of 2019. For the first half of 2020, the company reported income of $8bn, up 5% from a year earlier. Net interest margin was down 26bps from the first half of 2019 to 1.40%.

 

Credit impairment was lower quarter on quarter but up significantly Year on year, driven primarily by the impact of Covid-19. Stage 1 and 2 impairment was up $586mn in the first half to $668mn. Stage 3 impairment was up $727mn in the first half to $899mn, with no significant new exposures in the second quarter of 2020.

 

In the first half of 2020, underlying profit before tax was down 25% to $2bn due to higher credit impairment. Statutory profit before tax was down 33% to $1.6bn, including $249mn goodwill impairment in India in the first quarter of 2020.

 

 

Summary

 

 

Standard Chartered is also trading under its 2009 lows. It is really important to state that again, just to let it sink in. At the height of the financial crisis in 2009, when there were some genuine concerns that the entire financial global financial system could collapse Standard Chartered was trading higher than here.

 

If that does not put it into perspective I am not quite sure what does. The outlook on Standard Chartered is poor, the only serious argument to buying here would be that it was £600p earlier in the year and so it must be due a bounce of some kind, surely? That is not a compelling argument. Could it bounce to 400 from current levels of 340, maybe, but dead cat bouncing is not an efficient way to build your capital in the long run. Standard is yet another financial to avoid for me.

 

 

 

HSBC (HSBA)

Net Asset Value (exc intangibles) $806.33c/629p

Discount to NAV (as of 25th Sept@290p) = 339p

 

 

HSBC Holdings plc is a British multinational investment bank and financial services holding company. It was the 7th largest bank in the world by 2018, and the largest in Europe, with total assets of $2.558 tn (as of December 2018). HSBC traces its origin to Hong Kong, and its present form was established in London by the Hongkong and Shanghai Banking Corporation to act as a new group holding company in 1991. The origins of the bank lie mainly in Hong Kong and to a lesser extent in Shanghai, where branches were first opened in 1865. The HSBC name is derived from the initials of the Hongkong and Shanghai Banking Corporation. The company was first formally incorporated in 1866. HSBC has around 3,900 offices in 67 countries and territories across Africa, Asia, Oceania, Europe, North America, and South America, and around 38 million customers. They operate in four business groups: Commercial Banking, Global Banking and Markets (investment banking), Retail Banking and Wealth Management, and Global Private Banking.

 

 

 

HSBC, the worlds local bank, a marketing stroke of genius from the Hong Kong and Shanghai Banking Corporation.  The company is well positioned globally, but that does not offer total immunity to the tempered view on UK banks over the last 12 months.  They offer a good opportunity to have exposure to the growth expected in the Asian economies.  This has fuelled them where the UK domestic banks have failed, but it will be interesting to see if the growth can be sustained, especially with the slowdown in Asian economies over the last 12 months.  

 

 

 

 

 

31.12.15($m)

31.12.16($m)

31.12.17($m)

31.12.18($m)

31.12.19($m)

PE Ratio

12.21

115.43

21.28

13.14

26.04

PEG

-2.11

-1.29

0.04

0.42

-0.5

Earnings per Share Growth

-5.80%

-89.26%

587.59%

31.25%

-52.38%

Dividend Cover

1.27

0.14

0.94

1.24

0.59

Revenue Per Share

472.74¢

392.20¢

410.63¢

445.65¢

501.18¢

Pre-Tax Profit per Share

84.16¢

24.02¢

74.06¢

87.22¢

54.53¢

Operating Margin

-

-

-

-

-

Return on Capital Employed

-

-

-

-

-

Dividend Yield

6.43%

6.31%

4.99%

6.16%

6.53%

Dividend per Share Growth

2.04%

1.72%

0.27%

-

-0.20%

Net Asset Value per Share (exc. Intangibles)

832.38¢

775.38¢

834.18¢

808.04¢

806.33¢

 

 

First half 2020 Figures

 

 

HSBC  reported a 65% year-over-year drop in pre-tax profits for the first six months of 2020 as it set aside more funds for potential loan losses that could come as a result of the coronavirus pandemic.

 

HSBC, Europe’s largest by assets, reported profit before tax of $4.32bn in the first half of this year down from $12.41bn that was reported a year ago and missing the estimated $5.69bn that HSBC had compiled from analysts.

 

The bank’s reported revenue fell by 9% to $26.7bn during the same period. That’s slightly above analysts’ expectations of $26.41bn, according to estimates compiled by HSBC.

 

 

Chief Executive Noel Quinn said the bank was “impacted by the Covid-19 pandemic, falling interest rates, increased geopolitical risk and heightened levels of market volatility.”

 

“The first six months of 2020 have been some of the most challenging in living memory. Due to the Covid-19 pandemic, much of the global economy slowed significantly and some sectors drew to a near total halt,” he said in a statement accompanying the earnings release.

 

 

“Current tensions between China and the US inevitably create challenging situations for an organisation with HSBC’s footprint,” he added.

 

 

Credit impairment provisions rose to $6.9bn due to the coronavirus pandemic and weak economic outlook; Net interest margin, a measure of lending profitability, was at 1.43% — down 18 basis points from a year ago due to lower interest rates globally; Operating expenses fell by 4% year-on-year to $16.53bn.

 

 

 

 

Summary

 

 

HSBC lows in 2009 were posted at 270, the recent lows have been at 284. So at least HSBC has managed to stay above this key level, so far. This is the only stock on this list that on a technical basis could be seen as a medium term buy, as the Monthly graph shows a very clear and strong cyclical nature to the stock. During 2009, 2012 and 2016 the heavy percentage falls were followed by strong recoveries. Albeit within the strong longer-term bearish trend. It still has a market capitalisation of £58bn and is well diversified both globally and in terms of its services. So, it is conceivable that HSBC could be trading back above £5/share in H2 2021. So if readers were simply desperate to buy into a major UK financial at the current levels HSBC is the best of a bad bunch. Although I can still see better financial buys over this time horizon, such as Square, or Paypal which are clearly in the right space to fully capitalise on the increasing digitisation of financial and payment services.

 

 

Sector Summary

 

 

The European Financial sector continues to live in the shadow of the 2009 financial crisis as it collectively failed to deal with the “Great Depression” as effectively as the US sector.

 

 

Steve Eisman, famously portrayed by Steve Carrell in the Big Short, who made billions of dollars shorting the US banks in the subprime crisis, remains publicly short of Deutsche Bank. citing concerns that it, like many European banks, continues to struggle with the low interest rate environment. and still needs to de-lever. While such a successful and profitable investor is outright short on the European banking sector it is difficult to get too optimistic on the future, even at the current low levels.

 

 

Behavioural Economics

 

 

We do believe that what is occurring to many when looking at these stocks is “Anchoring”. Which is a very common heuristic. A heuristic is a mental shortcut, which evolution has created to allow the mind to quickly approximate complex calculations to a level that is broadly correct. The issue is that these heuristics are often proven to be wrong. Anchoring is a comparably powerful phenomena with numbers,   where decisions made by individuals are often unconsciously affected by other numbers, even numbers completely unrelated to the question at hand.

 

 

 Final Summary

 

 

Due to share prices being the discounted present value of all expected future cash flows, and as these companies are still financially viable, we can expect them all to be trading higher in 20 years’ time. So, you should buy them then? Well no, as detailed above, an investor simply cannot think like this, the real question is what would another investment make over this period, Amazon, Google, Microsoft etc? Then the decision becomes clear.

 

 

 

At the current depressed levels the dividend yields within the sector could tempt in some and as the collapse has been so drastic in recent weeks a dead cat bounce of sorts could see the likes of Lloyds potentially even doubling from here, IE from 25p to 50p. We do not see this as a compelling reason to invest here for the long term and would be more interested in shorting any such rally than attempting to capitalise on any such moves ahead.

 

 

 

In the weeks and months ahead, we have the US election, second wave of Covid-19 and hard Brexit to contend with, in this environment it is hard to see the banking sector outperforming over the Q3 and Q4 and even Q1, 2021. Not until Q2 2021 would we expect the sector to start to open up again to long term investors, so for the Covid-19 winter of 2020 we would recommend avoiding these names like the plague!