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Bank Earnings Update

Morningstar analyst Erin Davis gives her opinion about the half-year earnings results being announced by major London-listed banks

Alanna Petroff 2 August, 2012 | 11:42AM

Earnings season has been in full force over the last few days, with many major London-listed banks issuing their half-year earnings results. Some banks surprised to the upside, while others reported results that fell below expectations.

Morningstar’s banking analyst, Erin Davis, gives her opinions on the results of the following large-cap banks: 

Standard Chartered (STAN)
HSBC Holdings (
HSBA)
Lloyds Banking Group (
LLOY)
Barclays (
BARC)

Standard Chartered
The latest bank to report earnings was Standard Chartered, which is one of Davis’ favourite banks “because it is one of the few global banks that wasn't deeply damaged by the financial crisis and we think its future looks equally bright,” she says. 

“Standard Chartered posted net income of $2,856 million for the first half ($1.155 per diluted share), amounting to a robust 14% return on equity. Earnings increased 28% from the trailing half and 14% from the year-ago half and the bank announced a 10% increase in its interim dividend,” writes Davis in her latest report. “The bank continued to benefit from its diversified business and conservative strategy.”

Davis’ fair value estimate for Standard Chartered rests at 1,800 GBP. She believes the market is likely undervaluing the company, since her fair value is 20% above the current market value.

“We continue to see Standard Chartered as being among the world's strongest global banks ... The bank said that it expects to have no involvement in the LIBOR scandal, and stressed its commitment to strong corporate governance,” said Davis.

HSBC Holdings
Davis also believes HSBC is being undervalued by the market, saying there is much to admire about this bank despite its current troubles with a money laundering scandal.

“We were impressed by management's seemingly sincere apology for the bank's involvement in the money laundering scandal and its apparent resolve to continue streamlining the bank's operations and to make the group easier to manage,” writes Davis in her latest report. “We think the streamlined strategy will free up capital to fuel growth in emerging markets and prepare for Basel III, while helping management to cut some of the fat out of its operations.”

Lloyds Banking Group
Meanwhile, Davis has been less impressed with the recent numbers from Lloyds and Barclays.

“Lloyds Banking Group lost £676 million in the first half (£1 per share) after taking an additional £1,075 million provision against charges that the bank mis-sold payment protection insurance. Underlying results were also disappointing, as the difficult economic environment continued to take a toll on Lloyds,” she writes in her latest report.

Barclays
Barclays’ also posted a variety of write downs, provisions and penalties for the first six months of 2012, but when you take those out, Davis says the results were fairly strong.

However, Davis still remains sceptical about Barclay’s long-term prospects.

“Barclays has generated an increasing portion of its profits through fast-growing but risky businesses such as investment banking through Barclays Capital ... and international retail and commercial banking,” explains Davis in her latest research report. “Barclays Capital acquired the remnants of Lehman Brothers in 2008 at a significant discount to book value. While we thought this would create significant long-term value, so far we have yet to see much proof--Barclays is struggling to grow revenue and keep costs under control.”

Davis' full reseach reports are available to Premium subscribers. Not a Premium member? Get instant access when you take a free 14-day trial.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author Alanna Petroff

Alanna Petroff  is a financial journalist with Morningstar UK.