It was always set to be a big week for the UK’s banks with the release of their Q2 numbers with the expectation that their profits would come under scrutiny due to the low savings rates being received by their respective deposit rates.
With mortgage rates surging and deposit rates lagging well behind several politicians have been calling for further windfall taxes on a sector that has by and large performed well over the last few years.
Events have taken over and the resignation of NatWest CEO Alison Rose has been forced to step down due to a row over the leaking of details of the bank’s relationship with Nigel Farage. The saga raises questions over the governance of the bank and more specifically the Coutts business. It also raises questions over NatWest chairman Howard Davies and the oversight of GDPR and other client confidentiality rules.
Only 24 hours ago, Davies and the board expressed full confidence in Rose after she admitted being behind the leak to a BBC journalist. On any other level this behaviour would have invited a disciplinary procedure against a more junior member of staff and probable dismissal, yet for some reason the board adopted the position of nothing to see here.
This would suggest a deeper problem behind the bank’s governance and the rules around the behaviour of staff, as well as the future of Howard Davies as Chairman. On what world would a junior member of staff have been allowed to stay on with a simple apology if they had been found to have committed a similar transgression? Howard Davies has serious questions to answer about the bank’s disciplinary procedures. Do they not apply to senior management?
This story may have some legs in it yet with the banks results on Friday likely to be overshadowed by the row.
Moving onto today’s Q2 numbers from Lloyds Banking Group and shareholders will be looking for positive news given that the shares have been on a slow downward track since cresting at one-year highs in February and falling to 7-month lows in June.
When Lloyds set its guidance in in February the bank said it expected to see net annual interest margin to improve to greater than 3.05%, up from its previous estimate of 2.8%, while operating costs are set to remain static at £9.1bn, rising to £9.2bn in 2024.
Today’s H1 numbers has seen the bank raise its full year guidance on NIM to be above 3.1% while keeping operating cost forecasts unchanged.
Despite this more positive outlook the shares have slipped back after profits fell short of expectations. This miss on profits appears to be down to an increase in provisions for non-performing loans, which came in at £419m, and a fall in Q2 NIM to 3.14% down from 3.22% in Q1.
On the underlying business customer deposits fell by £5.5bn, an improvement on the £8bn fall in Q1, helped by an increase in retail savings balances. In a sign that loan demand is slowing lending to customers fell by £1.6bn in Q2 and by £4.2bn from a year ago.
Statutory profit before tax in Q2 came in a £1.6bn, pushing H1 profits up to £3.87bn on revenues of £9.54bn.
While today’s decline in the share price is disappointing and has translated into similar weakness in the likes of the Barclays and NatWest share price, the reaction seems somewhat overdone given that on all the major metrics the bank is performing well.
Of course there are justifiable concerns over the outlook for the UK economy, with the increase in bad loan charges, but profitability is still strong, and margins are healthy as well as being above the levels we saw a few years ago when the share price was much higher.
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