Worst is Over for UK Banks

The Week: Lloyds, HSBC and Barclays have seen profits, revenues and share prices drop this year. But Morningstar columnist Rodney Hobson thinks the worst is over for the sector

Rodney Hobson 30 October, 2020 | 9:16AM
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The Week

Pessimists have found the pot three-quarters empty this week and they still clearly hold sway on stock markets across the world. However, it is pleasing to see the pot is a quarter full in the banking sector. Optimists like me are clinging on.

The fall in the FTSE 100 index to 5,600 points this week was particularly disconcerting. There was a time a few weeks ago when 6,000 looked to have been established as a floor. When that gave way, there was the consolation of believing the index would steady at 5,800 points.

Unfortunately the blue chip index is weighted down by a few heavyweight fallers, including the banks. Yet HSBC (HSBA) and Lloyds (LLOY) have followed Barclays (BARC) in beating expectations for the third quarter.

Key figures such as revenue and profits are showing hefty drops. However, the third quarter figures are no worse than those for the first half and in some cases considerably better. For example, Lloyds underlying pre-tax profits fell 36% in the quarter compared with the same quarter of 2019 but that was massively better than the loss sustained in the first half. The bank is now showing a profit for the year so far, albeit a much reduced one.

I hold shares in both Lloyds and HSBC and have been arguing that the halving of the share price - from 67p to below 30p in the former and 600p to around 300p at the latter - has been overdone. Confidence in the sector has been badly dented and a bumpy road lies ahead. I do think, though, that the worst is over.

I hope the same can be said of another of my holdings, advertising group WPP (WPP), which I bought into during a pause in March’s downward lurch. I was premature then but there could be tentative signs of a levelling off now. The third quarter saw total revenue fall 9.8% compared with a drop of 11.5% for the year so far.

China and India are faring worst of the major markets but the US, UK and Germany in particular are improving encouragingly and there is good momentum in winning new business.

The shares are down from 1,070p at the start of the year to around 600p now after a recovery from 490p petered out. There is no reason to believe they will take off until there is better news but at least the downside looks limited.

Dividend Delight

Oil companies have been among the worst performing shares this year, as I know to my cost, having held onto Royal Dutch Shell (RDSB) grimly. The price of crude flows through pretty much to the bottom line and it has been understandably depressed on fears of a global recession. Making matters worse for the sector, the environmental campaign against fossil fuels that has already shrunk the coal industry is sounding an early death knell for oil.
Shell has consistently raised its dividend for years and there was every reason to think that the current circumstances would cause a hefty slashing of the payout or even see it suspended for the indefinite future.

Surprise, surprise. Shell has declared an increased third quarter dividend. At the same time it is reducing debt and talking optimistically about future dividend payments, though there is a sting in that tail. Shell is talking of setting the dividend at 20-30% of cashflow from operations, which does allow for a dividend reduction in dire circumstances.

Shell shares perked up on the news but remained below 900p, which is even worse than the 917p low in the mid-March stockmarket sell-off. The shares may well resume their slide in the short term but there’s an awful lot of upside potential when we eventually come out of this quagmire. I believe we will see 1,500p tested again next year.

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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About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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