UK Banks’ Costs and Growth in Focus
It’s getting slightly easier to be a UK bank. Last year, British lenders paid just 5% of the amount of penalties to the FCA that they had to pony up in 2014, some £67m in total. The average fine also dwindled and fewer transgressions were reported. These figures don’t include settlements with overseas regulators or compensation for such issues as PPI. Nonetheless, banks are behaving more and paying fewer fines. That’s unsurprising given that the cost of compliance excluding financial penalties has risen exponentially since the financial crisis. The biggest global lenders spend in excess of $1 billion a year on compliance-related costs, according to bank software group Finastra. For the likes of HSBC, Lloyds and Barclays, that equates to upwards of 10% of annual operating costs.
Signs that these costs are at last beginning to slow could mean top-line pressure may also abate from here. Just over half the 900 banks polled for Thomson Reuters’ Cost of Compliance survey last year expected such budgets to increase slightly or significantly over 12 months. In 2016, 69% expected an increase. The ease-off will be welcomed by investors. Barclays, for instance, effectively earned nothing between 2012 and 2015 because it paid fines and charges totalling £21bn. It’s possible that a peak in compliance costs and penalties offers a new baseline for growth. Unfortunately though, growth is a challenge in itself for British banks. Even Lloyds and HSBC, widely perceived to be the furthest along the curve in putting legacy issues behind them, made returns on common equity over the last 12 months well below 10% a piece. The figure is generally perceived to be the minimum large banks need to make to grow profits sustainably. There’s little chance these returns improved significantly in the first quarter. Consequently, as UK banks churn out Q1 results over the next few weeks their shares are likely to continue to hinge more on relative rather than absolute strengths.
Barclays tailwinds continue
This helps explain why shares in Barclays, which until Friday was under a cloud of the FCA’s probe into its CEO, have outperformed rivals with a 6% rise so far this year. Lloyds and RBS, Standard Chartered and HSBC have fallen. Additionally, barely predictable one-off costs, gains and write-offs will almost certainly play a far larger part than underlying performance in deciding how investors perceive upcoming UK bank results. This has been so in each quarter for several years and will probably remain so for years to come. One ray of light is a shift in investment banking trends. A rise in trading volumes in the first three months of the year handed U.S. banks a 6% revenue advance on average. HSBC and Barclays, which have retained the biggest exposure to trading amongst UK rivals, stand to benefit most.
Lloyds Banking Group Q1 trading statement scheduled 25th April – 7.00 am BST
- EPS consensus (underlying): £1.50, +36%
- Net interest income: £3.1bn, +32.6%
Barclays Q1 – Thursday 26th April– 7.00 am BST
- EPS consensus (underlying): £5.66, -21.4%
- Net interest income: £2.3bn, unchanged
RBS Q1 trading statement scheduled Friday 27th April -7.00 am BST
- EPS consensus (underlying): £8.35, +17.6%
- Net interest income: £2.2bn, -1.3%
Standard Chartered Q1 trading statement scheduled 2nd May – 5.15am BST
- EPS consensus (underlying): $0.73
- Net interest income: $8.8bn
HSBC Q1 earnings scheduled 4th May – 4.00 am BST
- EPS consensus (underlying): $0.20
- Net interest income: $30.87bn