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14 January 2018

Banking Sector Outlook 2018

10 years on from the financial crisis, Banks are back with a bang. With a global share price rally of just under 20% in 2017 according to MSCI, global banks have come a long way from the dark days of 2008.

Following tales of brash bankers’ bonuses, and never being far from a new scandal, a lot has been done to turn around their reputations in the post-crisis world.

But will 2018 finally see their shackles cast off by the Trump administration, while central bankers reign in their purse strings after years of generous spending?

This report explores ongoing themes that will move the UK banking sector, and also looks into what we can expect from each of the big four banks in 2018.

Central Banks Ween the Market

The post-crisis period has been defined by the immediate action of central banks to stem financial concerns. A key provision, enacted by monetary policymakers from Europe to Japan, was Quantitative Easing (QE) – the purchase of public and private debt by central banks, while simultaneously reducing interest rates to their lowest ever levels.

10 years on, only the Federal Reserve has ended its QE programme and started raising interest rates, while the European Central Bank (ECB) began tapering its asset purchases at the tail end of 2017 and the Bank of England continues its vast QE cycle.

But 2017 did show the tide may be turning. On top of hiking interest rates, the Fed is ending reinvestment of its QE profits, while the ECB may look to extend its taper later in the year. And although the BoE hasn’t made an announcement on a sustained hiking cycle yet, 2017 saw its first interest rate hike in 10 years.

Trump’s First Act: Tax Reforms

Not everything went in favour of President Trump during his first year. But after months of cracking heads, his administration finally achieved a legislative victory – the first US tax reform in 30 years.

Cutting the main corporation tax rate to 20% from around 35%, one of the world’s highest, has resulted in a number of both US-based and US-exposed firms announcing a one-off hit to Q4 profits, however the reform is also expected to raise future earnings.

How these banks manage the new legislation going forward, through reinvestment, dividends or share buybacks, will be the key to 2018 performance.

And Republicans’ Tough Second Album

With tax reform marking a major moment not just for Trump, but also for Republicans, the administration hopes the average worker will benefit enough to secure a victory in mid-term elections in November.

However, what Trump does next will also be key.  There are multiple ideas of what the President will decide, although widespread sector deregulation seems to be the Republican’s preferred dish.

Whether that will extend to a vast repeal of the Obama era Dodd-Frank regulations – including the Volcker rule which bans internal proprietary trading – remains to be seen. However, with trading profits falling at investment banks across the world, many could look favourably on such a decision to repeal.

Overleaf, we delve deeper into the four main UK banking stocks, exploring the 2018 trends that will affect each of the institutions key to the UK economy.

Page: 01

Barclays

The most US-exposed of the UK Banks, Barclays could stand to be the greatest benefactor of President Trump’s next policy focus. A deregulation-happy administration that sets its sights on Obama era legislation – including the Volcker rule, a law unpopular with Wall Street that bans in-house proprietary trading – could result in a fresh wave of optimism in the States and even the re-establishment of those outlawed trading desks.

Closer to home, how the Bank of England responds to rising inflation, and ongoing Brexit talks – including a potential bespoke deal for the financial sector – will be key factors as to how the cross-border bank fares in 2018.

HSBC

The other internationally-exposed UK Bank, HSBC (HSBA), also looks set to benefit from the US tax reform which, although potentially leading to a one-off profit hit in Q4, could lower the global bank’s total tax bill.

But, as the largest UK bank, HSBC will also be closely watching Brexit negotiations. Headquartered in London, the bank currently has unfettered access to UK and European markets. If, however, no deal to allow UK financial services to access the European mainland is reached, it could force the bank to move. Tack on a heavy reliance on Asian markets such as Hong Kong, and HSBC will be the institution most influenced by global events in 2018.

Lloyds

The bailed-out banks turned retail investor darling, Lloyds (LLOY) remains a key barometer of the UK economy as the holder of its largest mortgage book. Under Chancellor Hammond’s leadership, the Treasury has sold the entirety of its 43% post-bailout position. Now, the bank looks to return to its heady pre-2008 300p highs.

How can it achieve that? Further hawkishness from the bank of England would be needed in 2017, having raised interest for the first time in a decade in 2017. Whilst policymakers have forecast a further two rate hikes over the coming three years, any indication that high inflation will persist may force them to act sooner, rather than later.

Royal Bank of Scotland

As the only major UK Bank to be bailed out by the taxpayer that remains in the Government’s hands, the Royal Bank of Scotland (RBS) has been forced to all but retreat from its operations that once spanned the globe. That, however, could be seen as a bonus for those traders looking for isolation from the US – in particular the man leading administration and his propensity to act on a whim. Might 2018 be the year to stay away from the US?

The bank has done a lot to clean up its act, settling several legacy court cases. With that said, the big one is still outstanding; despite settling fraud claims with the US Department of Justice, RBS is still faces a multi-billion dollar fine for selling mortgage backed securities before the 2008 crisis. Will a figure finally be reached this year?

Over the page, we delve deeper into the technicals behind these stocks. Accendo Markets’ research team puts together similar publications daily on indices and commodities, as well as blue-chip equities. To discover more, sign up here.

Page: 02

Barclays (BARC)

Will Barclays rally to May highs of 217p (+11%) or fall back to November lows of 177p (-9.2%)?
  • Shares are retreating from falling highs resistance. Will they return to 177p lows or bounce back?
  • Relative Strength Index (RSI) bearishly crossed 50, while Stochastics turned back from overbought
  • Momentum negative and at the lowest level since early November
  • Brokers are positively-biased, with three quarters holding a 12-month price target above current level
Broker Consensus: 40% Buy, 44% Hold, 16% Sell

Bullish: AlphaValue, Buy, Target 274p, +41% (11 Jan)

Average Target: 207.2p, +6.3% (11 Jan)

Bearish: Day by Day, Sell, Target 142.4p, -27% (15 Nov 17)

 

Pricing data sourced from Bloomberg on 11 January. Please contact us for a full, up to date rundown.

Page: 03

HSBC (HSBA)

Will HSBC return to 2016 highs of 900p (+13%) or fall to 2016 lows of 415p (-48%)?
  • The bank’s shares have broken out from 773p, 9-year resistance. Will they return to pre-crisis highs?
  • RSI is overbought and at highest level since July, while Stochastics bullishly hold above 50
  • Momentum is positive but has failed to better December highs
  • Brokers are neutral on HSBC, with almost 50% suggesting you should ‘Hold’ the company’s shares
Broker Consensus: 36% Buy, 49% Hold, 15% Sell

Bullish: Jefferies, Buy, Target 920p, +15% (7 Dec 17)

Average Target: 767.6p, -3.7% (11 Jan)

Bearish: Grupo Santander, Underweight, Target 442p, -45% (2 Oct 17)

 

Pricing data sourced from Bloomberg on 11 January. Please contact us for a full, up to date rundown.

Page: 04

Lloyds Banking Group (LLOY)

Will Lloyds rally to its 2017 highs of 73.5p (+5.2%) or fall to September lows of 62.2p (-11%)?
  • The high street bank’s shares have broken out to 6-month highs. Will the rally keep momentum?
  • RSI at highest level since May 2017, while Stochastics are yet to break above the overbought mark
  • Momentum is positive, but is yet to overcome resistance at October highs
  • Brokers are very positive, with over 80% projecting a 12-month price target above current level
Broker Consensus: 57% Buy, 18% Hold, 25% Sell

Bullish: Jefferies, Buy, Target 91p, +30% (29 Nov 17)

Average Target: 72.3p, +3.4% (11 Jan)

Bearish: Goldman Sachs, Sell, Target 53p, -24% (5 Dec 17)

 

Pricing data sourced from Bloomberg on 11 January. Please contact us for a full, up to date rundown.

Page: 05

Royal Bank of Scotland (RBS)

Will RBS rally to 2015 highs of 415p (+40%) or fall to Brexit lows of 150p (-49%)?
  • The taxpayer-owned bank has rallied to a 2-year high. Will the rally continue towards 2015 highs?
  • RSI has crossed extreme-overbought mark (above 80) for the first time in over two years
  • Momentum is at the highest level since November while Stochastics yet to turn overbought
  • Brokers are leaning negatively, with just 45% projecting a 12-month price target above current level
Broker Consensus: 31% Buy, 50% Hold, 19% Sell

Bullish: Grupo Santander, Buy, Target 346p, +17% (2 Oct 17)

Average Target: 287.3p, -3.2% (11 Jan)

Bearish: Mediobanca, Underperform, Target 244p, -17.8% (21 Nov 17)

 

Pricing data sourced from Bloomberg on 11 January. Please contact us for a full, up to date rundown.

Page: 06

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Page: 07

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