Lloyds [LLOY] share price versus UK banking peers: whose on top as Brexit looms?

The UK's major banks, Lloyds, RBS, Barclays and HSBC, have had almost three years to prepare for an EU exit – so where does each stand?

 

Lloyds Bank [LLOY]

The treasury shed its last stake in the bank last year, and although its share price collapsed by 24% over 2018, Lloyds shares have bounced back in 2019 – gaining over 10% so far – and investors have been enjoying a healthy 5.5% dividend yield.Powered by CMC Markets, as at 30 January 2019

 

CEO António Horta Osório has shown cautious optimism around Brexit, praising the UK’s resilient economy despite uncertainty and expressing hopes for a deal to be hammered out at the last minute. On top of this, the bank has pledged to lend some £18bn to businesses in 2019.

Nonetheless, with the core of its business in retail and business banking, Lloyds is intrinsically exposed to any economic downturn that may come from Brexit. As the UK’s biggest mortgage lender, any downturn in the property market could have a negative impact on revenue.

Meanwhile, Lloyds’ preparations for continued access to the EEA single market is set to be particularly costly. It has already converted a Berlin branch into its main EU subsidiary. In order to comply with new regulations requiring retail banking to be ring-fenced from higher-risk capital market activities, the group will also be opening two further subsidiaries, for trading and insurance customers. 

Bullish as it may be, Lloyds will inevitably have to reckon with Brexit’s effects on its books – possibly by putting the brake on dividends.

 

Royal Bank of Scotland [RBS]

Once the biggest bank in the world by assets, the Royal Bank of Scotland group has spent the last decade since a bailout by UK taxpayers in 2008 cleaning up its name and downsizing operations. The restructure has seen its tarnished investment banking division moved under subsidiary Natwest, leaving RBS focused on consumer and business lending.

RBS is hoping to serve its EU customers after Brexit via its NatWest Markets’ subsidiary in the Netherlands. Pending a hearing with the Scottish supreme civil court in February, the bank intends to transfer £6bn in assets and £7bn in liabilities to Amsterdam. It has also applied for a German banking licence.

The bank’s CEO Ross McEwan has warned that a no-deal Brexit may plunge Britain into a recession, adding that RBS had tightened lending standards in sectors such as retail and construction as a result. In October, the bank explicitly linked a £100m provision to possible bad loans from Brexit-hit businesses, and pledged £2bn to help smaller firms navigate departure from the EU.

£2bn

Amount RBS have pledged to smaller UK businesses to help navigate their departure from the EU

RBS paid out its first dividend in a decade last year, but at about 240p, its share price is well below the 502p the UK government paid to bail it out – which resulted in a £2.1bn net loss when Treasury sold 7.7% of its stake last year.

RBS has spent much of the last ten years fixing itself. McEwan now needs to keep the profits and share price momentum going as Brexit risks hampering his growth efforts.

 

Barclays [BARC]

The 300-year-old bank is taking a worst-case-scenario approach to Brexit. Chief executive Jes Staley is of the opinion that politicians will keep squabbling about the terms of the UK’s departure from the European Union until the last minute, and the bank has been moving out as much as half of its EU-related trading risk.

The main beneficiary is set to be Barclays’s Ireland subsidiary, which will become the main entity serving EEA customers in areas such as private and corporate banking, as well as gain legal ownership of branches on the continent. The bank’s Frankfurt office has also been on a recruitment drive since last year, though vacancies have been hard to fill as candidates fear being exposed to a Brexit-related downturn, according to a November report from eFinancialCareers.

On the inside, Staley is facing a threat from activist investor Edward Bramson, who has been pushing for a radical shrink-down of the investment banking unit to focus on the better-performing retail arm. Staley needs to regain investors’ trust after the bank’s share price slumped by 26% through 2018, but he is committed to maintain its position in capital markets on both sides of the Atlantic, despite Bramson’s calls.Powered by CMC Markets, as at 30 January 2019

 

Barclays gained a foothold over the pond with the acquisition of Lehman Brothers’ operations in 2008, and is often seen as the last truly global European investment bank. Coupled with an investor rebellion, Brexit is set to make maintaining that status a lot trickier.

 

HSBC [HSBA]

HSBC Holdings is arguably best placed to insulate itself from a post-Brexit downturn. In the six months to June 2018, almost half (49%) of total revenue came from operations in Asia, and CEO John Flint, who has been in charge since February 2018, has announced plans for significant investment in the region in his bid to drive growth and value at the bank. 

Of course, HSBC is still exposed via its UK retail customer base, particularly around mortgages, and Flint is ensuring continuity of business by moving EEA-focused operations to Paris. But the bank’s strong capitalisation and cash reserves could provide more robust Brexit protection to its balance sheet – and its sweet 5% dividend yield – than in the case of its competitors.

However, the focus on Asia means HSBC is highly exposed to the US-China trade war. The bank’s share price fell from 792p in January 2018 to a two-year low of 605p in October – but investors were quick to push it back to 664p when China and the US began negotiations in November.

5%

HSBC's dividend yield

Although still floated in London, HSBC has a relatively small UK business which may provide it with breathing room around Brexit to focus on a trickier scenario in the Pacific.

 

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