Banking Stocks Top Most Popular List Following Record Profits

Morningstar readers eye banking and energy stocks in February as five major UK banks revealed mixed 2016 annual results

Karen Kwok 13 March, 2017 | 3:02PM
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Investors favoured financial stocks last month, as the five major high-street UK banks revealed their 2016 annual results. Lloyds Banking Group (LLOY) has held the top spot on the most clicked on stocks on Morningstar.co.uk for an impressive 17 months. In February it was followed by HSBC (HSBA) and Barclays (BARC) in second and ninth place on the list.

Energy stocks were also popular among Morningstar readers last month amid renewed concerns about energy output. This morning oil prices dropped to a three-month low at $48 as the latest US crude inventories saw a rise at the first week of March, offsetting positive sentiment over OPEC’s efforts to restrict crude output.

The FTSE 250-listed infrastructure maintenance service provider Carillion (CLLN), telecoms stock BT (BT.A), Vodafone (VOD), consumer stock Unilever (ULVR), and pharmaceutical company GlaxoSmithKline (GSK) were also on the most popular list last month.

A Mixed Bag of Results from the Banks

Last month Lloyds and Barclays both reported a jump in annual profits while HSBC revealed a 60% fall in profits in the fourth quarter of 2016. These three banks currently hold three-star ratings, meaning Morningstar analysts believe they are trading at their fair value estimate.

Lloyds’ annual report revealed a 10-year high in profits in 2016 at £2 billion, fourfold the previous year’s £466 million.

Derya Guzel, equity analyst with Morningstar said the 2016 result of Lloyds is an important milestone for achieving management’s long-term targets. Lloyds is now one of the best-capitalised banks in Europe and is set to begin returning capital to shareholders in the form of dividends.

Meanwhile, Barclays’ profits tripled in 2016, up to £3.2 billion from £1.15 billion, although this was slightly below consensus forecasts, says Guzel.

On the operational side, the management team highlighted that the bank has felt no impact from Brexit headwinds so far, but we are starting to see the impact of inflation on consumer confidence in the U.K, hinting that some balance sheet slowdown is unavoidable in coming quarters,” said Guzel.

In a difficult growth environment, costs are the more straightforward lever for HSBC’s management team to pull to improve returns, said Stephen Ellis, director of financial services equity research with Morningstar. This morning HSBC announced the appointment of Mark Tucker as the new chairman, with responsibility for leading the search for its next chief executive, in order to meet the bank’s current chief executive Stuart Gulliver’s desire to retire in 2018.

Last week, banking shares slightly rose following the improved GDP outlook in the UK.

Energy Stocks Under Pressure

OPEC's production cuts and strong demand growth have 2017 crude fundamentals in their best shape since oil prices crashed two years ago, said Allen Good, senior equity analyst with Morningstar. However Good said the odds of a healthy oil outlook playing out have markedly worsened since.

The reason is that major increases in shale activity now have US production firmly on a path of rapid growth, even if rig counts don't increase further, said Good.

“This growth plus the eventual supply increases from OPEC is likely more than enough to erase any market tightness and throw crude markets back into oversupply,” said Good.

Nothing is certain in the world of oil and clouds appear to be gathering on the horizon, said Good. Investors are watching UK energy stocks, as BP (BP.) and Royal Dutch Shell (RDSB) came forth and seventh on the most clicked stock list on Morningstar.co.uk last month. BP is down 7.6% year to date while shares in Shell have fallen 6.1%.

BT Deal Settlement with Openreach

Ahead of the BT Group’s agreement with the telecom regulator Ofcom regarding its Openreach division, investors closely watched the share price last month. BT came third on the list of the most clicked on stocks in February. Under the agreement, Openreach will be a legally separate company from BT with its own board of directors, with the majority of directors being independent. However, BT will remain the owner of Openreach. 

Allan Nichols, senior equity analyst with Morningstar is pleased to see this settlement, which removes the uncertainty caused by Ofcom's threats to force BT to spin off the business into its own entity. 

The FTSE 250-listed infrastructure maintenance service provider Carillion (CLLN) also received investors’ attention in February as the company signed a three-year extension to its framework agreement with Openreach. Carillion said the framework with BT is expected to generate up to £900 million of revenue over three years, and potentially up to £1.5 billion over five years as the agreement provides for a two-year extension, subject to performance. Carillion came fifth on the most popular stocks list on Morningstar.co.uk in February. 

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.

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Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk