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Can British lenders match the strong showing from their US counterparts?
Thursday 21 Oct 2021 Author: Mark Gardner

Investors have just witnessed five of America’s largest lenders J.P. Morgan, Bank of America, Citigroup, Morgan Stanley and Wells Fargo beat quarterly earnings expectations.

Investors’ attention will now turn to the UK banks sector ahead of next week’s third quarter earnings updates. Three key issues are likely to dominate.

First, Andrew Bailey, governor of the Bank of England, has warned that it will have to act over rising inflationary pressures. This suggests that UK interest rates could rise soon.

An increase in interest rates would have significant implications for the profitability of the UK banks sector. Second, the central bank has now removed all restrictions on bank dividends and share buy-backs.

This has raised the possibility of more progressive dividend policies as we move into 2022. Third, investors will be looking for updates regarding the move of both HSBC (HSBA) and Lloyds (LLOY) into the wealth management segment.

The market is now expecting an interest rate rise by Christmas. This is primarily the result of pervasive inflationary pressures impacting wages, fuel and food.

Higher interest rates are positive for banks because it should enable them to charge higher rates of interest for lending (although it could also lead to increased risks of bad debt).

A resulting boost to in sector net interest margins (a key measure of profitability) could act as a catalyst for share prices.

In July the Prudential Regulation Authority, the Bank of England arm that oversees banks’ capital management reversed its restrictions on bank dividends and share buy-backs. This has raised the prospect of the UK banks sector adopting a more progressive dividend policy going into 2022. This is significant because the UK banks sector has historically been a key source of yield for income investors.

Lloyds recently announced the £390 million acquisition of wealth manager Embark which augments its position within the asset management segment. Embark is a fast growing investment and retirement platform business. HSBC is following a similar strategy to Lloyds and intends to become the leading wealth manager in Asia over the next five years.

The market will be looking for progress in both HSBC and Lloyds’ expansion into the wealth management industry in their forthcoming updates. Investors will also be monitoring Lloyds move into the corporate landlord market where the bank has scale, an enviable vantage point and cross-selling opportunities.

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