We have a big week for UK banks coming up as three of the big four UK banks set out their latest trading updates. At the last updates we continued to see additional sums set aside in respect of PPI but that does seem to be coming to the end of its life if todays’ numbers from Lloyds are any sort of a guide.
In today’s Q3 trading update the UK focussed bank was able to post Q3 profits of £2bn, up from last year’s £811m, and above forecasts of £1.6bn. Despite this welcome news the share price response has been muted at best and remains well below the highs we saw just before this year’s UK election.
This share price weakness is probably down to concern about a slowing UK economy and a bank that has a significant chunk of the lending market at a time when the Bank of England has been expressing concern about an overleveraged consumer. This exposure has been magnified in the last twelve months with the banks £1.9bn purchase of the MBNA credit card business from Bank of America.
This may help explain why the bank increased its impairment provision in Q3 to £270m, a number which was slightly above what markets had been expecting, and caused the share price to slide back. This seems an eminently sensible course of action at a time when there is concern about rising car finance and credit card debt.
According to Bank of England figures it is estimated that total UK credit card debt is around £67bn, while car finance is just below £60bn, across the whole of the UK.
As one of the UK’s major lenders it is only sensible to mitigate against some of those loans going bad, and given recent requests by the Bank of England for banks to boost their capital reserves by up to £10bn this could be an area which may start to weigh on profitability, especially if rates stay where they are.
Lloyds net interest margin is still fairly good at 2.85% but could improve if the Bank of England raises rates, as expected next week.
On Friday Royal Bank of Scotland will also be announcing its latest Q3 numbers, however one can’t help but think its numbers could well be overshadowed by the controversy over how it treated small businesses in respect of its GRG unit.
In the first half of this year the bank returned a profit of £939m, with optimism high that this year could see the first annual profit since 2007. At the end of last year the bank set up a compensation fund in respect of misconduct at its GRG unit to the tune of £400m, however this sum could well rise in the coming months given recent headlines that the bank deliberately excluded thousands of small businesses from the scheme.
The unit is currently under investigation by the FCA and is yet another legacy issue that needs resolving before it can truly be said the bank has turned a corner.
On the underlying business the bank continues to perform well, and speculation about an increase in the base rate will have helped with respect to its margins for the current quarter, but one can’t help thinking that the £400m set aside last year for GRG could be the first of in a number of new provisions over the next few quarters, if the enquiry by the FCA leads to further investigations into alleged criminal practices.
We could also see RBS adopt a similar stance as Lloyds in regard to setting aside higher provisions for loan impairments, given tighter lending conditions and criteria.
Of the major UK banks RBS shares have probably performed the best over the last month, up from 240p in the middle of September to above 280p now and their highest levels since January 2016. It would be a shame if the controversy surrounding what went on in GRG creates another roadblock in the long and winding road to recovery.
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