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Your Money > Banking Articles > Close season - Banking Sector
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By Richard Hunter
As Standard Chartered brought the banking results season to a close, the overall market view of the sector remains cautious. In particular, the threat of further credit writedowns continues to weigh heavily, particularly as the previous sub-prime losses could now be replaced by more "traditional", recession-led losses. In addition, the general lack (or reduction) of dividend payments has seen off the income seekers, whilst any lingering possibilities of nationalisation has left buyers in short supply. The first of the banks to report full-year results was Barclays, which had already taken much of the sting out of the £8 billion writedown news by announcing it two weeks ahead of the numbers. Even so, the shares remain down some 81% over the last year. Overall, Barclays remains just a hold in general market terms, despite its insistence of being a relatively stable business. Even though it flagged an inevitably challenging year to follow, its dogged determination and continued resilience may yet lead to analysts positively reviewing their opinions. Next came the Royal Bank of Scotland, where the task of unravelling previous management largesse began in earnest with the results announcement. The four main strands of the announcement - the record corporate loss, participation in the Asset Protection Scheme, the separation of the group into two arms, and the sale or reduction of two-thirds of its overseas operations - were well trailed and, if anything, generally beat expectations. Investors may yet take comfort from RBS' attempt to put a line in the sand, whilst the likely £25 billion increase in lending to UK homeowners and businesses will be a welcome development. The various proposals also put some more light between the current business model and the spectre of full nationalisation. Even so, the overall strategy must now be implemented amidst a further deteriorating economic backdrop, and it remains to be seen how RBS weathers this further storm. The 93% decline in the share price - and market consensus of a sell rating for the shares - may lead some investors to reflect that the company's prospects merit a very tentative upgrade for prospects. Lloyds Banking Group followed on, with few surprises coming out of the numbers, given the pre-warning which Lloyds (also) gave the market two weeks in advance. The Lloyds TSB part of the equation put in a reasonably robust performance over the year, but this was more than eroded by the £11 billion loss emanating from HBOS. Further impairments and writedowns are likely to prove a major headwind on future prospects, with management anticipating a 2009 loss. In the meantime, the general deterioration of the economic environment could negatively affect retail performance also. The lack of detail on Lloyds' likely use of the Asset Protection Scheme was slightly disappointing (and remains unresolved), and there were few crumbs of comfort in the results and accompanying statement. In all, the numbers somewhat took the wind out of the UK banking sector's sails after the previous day's gains, and the shares remain a weak hold in market consensus terms despite an 89% fall in the share price over the last year. Next, the double whammy of a rights issue, coupled with results at the lower end of expectations, conspired to drive both HSBC and the wider banking sector lower on the day of their results. The $11 billion goodwill writedown in North America may have stripped out some uncertainty, whilst the decision to exit some of the consumer facing US market may, with hindsight, prove somewhat tardy. Whether the capital raising is precautionary or a war chest for selective acquisitions remains to be seen, but any such positives were of little interest to a disappointed market. Over the last year the shares have fallen 48%, which comfortably outperformed its UK peers. However, the dividend cut and bleak outlook were hardly offset by a reasonably strong start to 2009, and the current market view of the shares as a weak hold is unlikely to change for the moment. Finally, the often overlooked Standard Chartered drew the banking results season to a close in some style. To have increased income by 26% and profits by 20% year on year was a notable achievement, whilst the regulatory capital cushion remains comfortable, particularly following on from the December cash call. The bank cited its Asian strategy, staying with banking basics and being open to business as strands for its success. It did nonetheless realise that the slowdown of the Asian economies will continue to present challenges, although not perhaps to the extent of the developed Western world. The shares have slipped some 60% over the last year, although the resilience of this performance may mean that the current market consensus of a hold finds itself under pressure on the upside. Richard J Hunter is Head of UK Equities Hargreaves Lansdown Stockbrokers Useful links: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
