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 Despite shoring up their capital bases and paying out strong
dividends, the five biggest banks - HSBC, Barclays, Standard
Chartered, Lloyds Banking Group and Royal Bank of Scotland - have
collectively seen their shares fall about 11 percent this year
against a 1.5 percent rise in the FTSE 100.
The costs of laying off staff, compensating customers missold loan
payment protection insurance and stockpiling cash to settle
outstanding lawsuits and regulatory investigations are all expected
to compound the hit to quarterly profits from record-low interest
rates.
Most analysts expect earnings to fall at the big five banks, with
Barclays, HSBC and Standard Chartered thought most likely to suffer
the biggest hits because of their large investment banking
operations.
The turmoil in global equities and commodities markets this year
made it harder for investment banks to make money in traditional
business lines such as trading and advisory. Barclays warned
investors this month that its first-quarter investment banking
earnings were likely to fall.
"Expectations for Q1 results are rock bottom," Bernstein analysts
said of big British banks, and posed the question: "Will this be a
one-off ugly set of results or is it setting up the table for a very
bleak 2016?"
Standard Chartered will be the first UK lender to report results, on
Tuesday, two months after announcing its first annual loss in 26
years after slashing jobs and selling unwanted businesses in a bid
to cut costs.
Such restructuring exercises by other top UK banks like HSBC and
Barclays have helped to control costs but left analysts uncertain as
to where growth will come from given the global economic outlook and
regulatory problems.
The major U.S. banks have this month set the tone for a dismal
quarter, with Goldman Sachs last week joining peers in
reporting plunging profits as market volatility hit its bond trading
and investment banking businesses.
BREXIT
Many British banks are struggling to boost profits with interest
rates at a record low.
A key measure of their earning power is the net interest margin (NIM),
the difference between the interest they get from borrowers and what
they pay savers, and this is generally narrower when rates are low.
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Lloyds, which reports earnings on Thursday, is expected to see its
first-quarter NIM contract to 2.6 percent from 2.7 percent in the
same period a year earlier, according to the average of analysts'
forecasts.
RBS, which reports on Friday, will also report NIM of 2.6 percent
according to analysts' estimates, up slightly from the same period
in 2015.
By contrast, the measure was on average 3.5 percent across the
British banking sector in 2009, according to an analysis by Cass
Business School published last year.
"You are going to have relatively disappointing earnings across the
board," said Ian Gordon, analyst at Investec Securities in London.
"I don't have a rosy-glowed view of a near-term turnaround."
Adding to investor uncertainty, this is the first set of results
where the government's 8 percent surcharge on banks' profits will
apply after rules changed at the start of the year, largely
replacing an earlier levy based on balance sheet assets.
British bank stocks are also being depressed by political
uncertainty, with some investors steering clear of the sector ahead
of the June 23 vote on Britain's membership of the EU.
"Whilst UK banks are keeping relatively quiet on the EU referendum
debate in their annual reports, uncertainty over the outcome is
weighing heavily on them," said Tim Howarth, banking partner at
KPMG.
(Editing by Sinead Cruise and Pravin Char)
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