With the strong year-to-date performance of commodities, the sector is, for some, one of the last remaining Value opportunities. For others, however, the shape of the interest rate curve and the collection of skeletons that continue to wait in soon-to-be-discovered cupboards make it cheap for a reason.
Because of this division, however, the third quarter earnings from not only from the UK’s three biggest domestically focused banks, but also the beleaguered German giant, Deutsche Bank are likely to garner a great deal of interest this week.
On the UK front, the focus is likely to centre on margins and non-performing loans. In general, a low interest rate environment puts pressure on banks’ margins as they borrow short term money and lend long term money. This is one of the litany of reasons banks have been hard hit in recent years.
According to James Illsley, manager of the JP Morgan UK Equity Core Fund, banks are increasingly a play on the shape of the yield curve.
“Obviously, with regard to the UK banks, Brexit is going to overshadow many people’s views of the sector, but if you look at the five year forward rate, there is evidence that the shape of the curve could steepen,” he said.
Turning specifically to the four banks in focus this week. With the resurrection of its dividend and its strong mortgage book, the focus for Lloyds is going to be on whether or not it has been able to maintain its margins and, also, what sort of guidance it is likely to give on the out look for the last quarter of the year.
RBS is slightly more difficult to analyse, but the focus for investors is going to be on how well it is getting on with its plans to simplify its structures. And, crucially if any new fines are in the offing.
Like RBS, Barclays has been streamlining its operations and it is likely that a lot of interest is going to be on exactly how much the split from its African operations is likely to cost.
