With the major UK banks due to report their first quarter results in the next couple of weeks, we believe the rally in the sector which began last autumn has staying power based on valuation grounds.

However, this is only a sector to trade short-term and we would be wary of brokers pushing an overly bullish narrative.

WHAT TO EXPECT

The reporting season starts with HSBC (HSBA) on 27 April, followed by Lloyds (LLOY) and Metro Bank (MTRO) on 28 April, NatWest Group (NWG) on 29 April and Barclays (BARC) on 30 April.

Key numbers important to the market are net interest income and the net interest margin. The first is the amount the banks are making on money they have lent out minus the income paid on deposits. The second is the same thing but expressed in percentage points as a margin on total loans and deposits.

Net interest income and margins have been whittled away by low base rates over the last couple of years, so the banks have had to try to grow their loan books faster than their deposits. However, during the pandemic people and companies ended up borrowing less and saving more so there’s unlikely to be great news on that front.

The news on bad loans should be better though. The banks have put aside billions of pounds for expected credit losses which have so far failed to materialise, so the market is expecting them to announce – or at least hint at – special dividends and share buybacks later this year.

INVESTMENT BANKS COME GOOD

For a change, the two firms with big investment banking businesses – Barclays and HSBC – should report bumper earnings from these divisions if the US investment banks are any yardstick.

Of the two, Barclays is generally acknowledged to have the better investment banking business and has taken market share from its Wall Street rivals in certain markets in recent quarters.

HSBC and emerging markets rival Standard Chartered (STAN), which reports on 29 April, are likely to have seen strong growth in the Asia Pacific region, although both are likely to warn that year-on-year growth will slow in 2021 as the region was the first to recover from the initial impact of Covid and performed well from the second quarter onward. 

Finally, with India struggling to control a new wave of the virus, Standard Chartered in particular is likely to stay cautious on its full year guidance and the message will be one of ‘controlling the controllable’, i.e. costs.

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