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UK investors turn bullish on ‘big four’ banks after bumper earnings



UK investors have started to warm toward Britain’s largest banks after a bumper quarterly earnings period but some are concerned “the easy wins may be over” with much of the positive vaccine and economic recovery news fully priced in.

This year the ‘big four’ banks have seen a stunning reversal of fortunes, delivering Q1 earnings above and beyond analysts’ expectations.  

HSBC and Natwestformerly RBS, saw profits rise 80% in the first three months of 2021, while Barclays’ nearly tripled to £2.4bn. 

Lloyds enjoyed the most profound bounce back with pre-tax profits surging to £1.9bn, a far cry from the sub £100m it generated over the first three months of 2020. 

Across the board the surge in earnings was due to a sharp drop in bad debt provisions. 

During the height of the Covid crisis banks took out huge forward-looking provisionsanticipating huge losses and a wave of defaults. But government support, like the furlough scheme, have helped minimise job losses and prevented more businesses from going belly up

UK equity managers are more positive than they have been on the domestic banks which have been viewed as a contrarian play for the last decade.  

‘Big four’ banks are an attractive recovery play

Tyndall Real Income manager Simon Murphy is among those bullish on the sector based on the expectation of a solid recovery for most geographies around the world but especially the UK. 

“A strong economic rebound will help top line growth for the banks and, given rising government bond yields currently, the outlook for net interest income (NII) margins is improving for all the banks,” Murphy says.  

On top of that the banks should see more benefits from the high levels of pandemic-related provisions that will be gradually released this year and in 2022.  

“We have already seen strong earnings ‘beats’ in the latest quarterly reporting season, mainly due to provision releases, and there is much more to go for.” 

Premier Miton Monthly Income manager Emma Mogford (pictured) has upped her financials position, moving to a slight overweight after several years of being underweight the sector. 

Mogford’s exposure is concentrated in two areas – UK domestic banks and non-life insurance firms. Of the big four banks she owns Barclays, Lloyds and Natwest, believing all three to be well placed to benefit from a UK economic recovery, which she thinks will “exceed current expectations”. 

“The sector’s outlook has always been closely tied to underlying economic growth,” Mogford says. With improving growth and falling unemployment comes better loan growth, better pricing on multiyear loans and lower bad debts. 

However, she adds that valuations will remain sensitive to expectations around interest rate rises in the future. 

UK banks are still cheaper than their European counterparts

JPM UK Equity Core co-manager Callum Abbott says several of the UK banks’ valuations also remain attractive. 

When the coronavirus pandemic hit banks were trading on similar multiples to the global financial crisis, despite having stronger balance sheets and significant government and central bank support than 2008/09, Abbott says 

While share prices have recovered since then, the domestic banks still look cheap especially compared with their European counterparts, he adds.  

Barclays, for example, trades on a 0.5x book value, a discount to its 10-year average of around 0.6x and well below the average European bank that trades on 0.8x.  

Abbot says: “The economy is rebounding rapidly, which drives lower impairments and increased activity in a number of their businesses. The strong economic rebound is also pushing interest rates up, which helps banks increase profits.”

Thanks to the regulator banning banks from paying dividends for most of last year they are now sitting on heaps of cash which…



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