Big banks’ reporting season wraps up with no sign of deposit flight or surprise bad loans at Lloyds

“Just like Standard Chartered, Barclays, NatWest and HSBC, Lloyds yesterday reported better-than-expected first-quarter results and in each case bar HSBC the big banks’ share prices just shrugged, because there have been no upgrades to full-year outlooks, just guarded commentary on inflation, the global economy and interest rates,” says AJ Bell investment director Russ Mould. “But this slightly dull picture compares very favourably with what is happening to US banks, where two of America’s twenty biggest lenders have collapsed in 2023, and the good news is the UK’s Big Five are showing no real signs of deposit flight, any unexpected deterioration in their loan books or undue risk-taking.

“This is a welcome marked contrast to their US counterparts and the UK banks trade cheaply relative to forecast earnings, dividends and historic tangible book, or net asset, value.

Source: Company accounts, Marketscreener, consensus analysts’ forecasts, Refinitiv data

“All of these facets will hopefully leave shareholders in the Big Five able to sleep more easily and for all of the drama in the USA, there is no real indication of any distress, if the FTSE 100 banks’ share prices are any guide.

Source: Refinitiv data

“The key source of disappointment among investors seems to be the absence of earnings forecast upgrades, thanks to the cautious outlook statements offered by management teams, especially on the issues of net interest margin and loan losses.

“Expansion in the former is expected to slow after a rapid advance in 2022, even though the Bank of England may yet take the headline base rate of interest to 5% from 4.25%, according to current consensus estimates.

“But this makes sense for three reasons. First, there is competition between banks, especially as interest rates rise and savers and borrowers shop around for the best deals. Second, UK bank executives will be noting how competition from money market funds in the US is siphoning away deposits from American lenders. And finally, no bank executive will wish to face accusations of excessive profiteering from the regulator or the wider public.

Source: Company accounts

“All three may also explain why the Big Five banks’ CEOs are not talking up earnings forecasts, even if their cumulative pre-tax profit for the first quarter of 2023 represented the best start to a year in over a decade. In fact, it represented the best three-month outturn for any quarter in the last ten years. The outlook for rates, inflation and the economy is uncertain – even if stock markets are currently doing their best to pretend otherwise – and it would be a brave CEO who wanted to raise expectations now and potentially make a rod for their own back later in the year.

Source: Company accounts for Barclays, HSBC, Lloyds, NatWest and Standard Chartered

“Loan losses are rising but by no more than expected and from abnormally low levels, according to consensus forecasts.

Source: Company accounts for Barclays, HSBC, Lloyds, NatWest and Standard Chartered

“All five banks have flagged an increase this year and that makes sense, given rate rises and some central banks’ switch to Quantitative Tightening from Quantitative Easing. Nothing that investors saw in the first quarter suggests the consensus estimates for 2023’s full-year loan impairments are too low and the banks’ Common Equity Tier 1 ratios suggest they are well placed to absorb such losses.

“Nor have the UK banks taken the sort of risks, in terms of asset gathering and lending, that hurt Silicon Valley Bank, Silvergate and First Republic so badly in the USA. Balance sheets, as benchmarked by risk-weighted assets, are smaller than they were five or ten years ago, and the spurt of growth exhibited in 2022 has slowed markedly in early 2023.

Source: Company accounts for Barclays, HSBC, Lloyds, NatWest and Standard Chartered

“The US crisis is one of liquidity and deposit outflows rather than solvency and whether asset valuations are sufficient to cover liabilities, so this feels nothing like 2008. That said, solvency and liquidity are inter-linked because a liquidity problem can force asset sales at almost any price and any losses on those fire-sales then start to question solvency.

“The good news here is that there is little indication that customers are pulling their cash from the Big Five, and NatWest explained away the first-quarter drop in its deposits as a matter of its customers paying their taxes on time.”

Source: Company accounts