The Week Ahead: Barclays, Natwest, retail sales, public borrowing
City A.M. takes a look at some of this week’s market-shaping events.
Barclays – Full year results (Thursday)
The past 12 months have been difficult ones for banks in general, but UK banks have underperformed relative to their peers, Hewson said, with the unknowns of what a final Brexit deal might look like also weighing on investor sentiment, along with the fallout from the ongoing coronavirus pandemic.
As a result of these concerns their overall performance since the beginning of 2020 has been “disappointing,” as Hewson put it, with Barclays the best performer amongst the big four, currently down over 15 per cent from where it finished 2019.
“The recovery off the March lows of last year has been a long slow one, with management forced to cut shareholder pay-outs, as well as setting aside billions of pounds in provisions for non-performing loans,” he noted.
Back in October Barclays set aside £608m in respect of this for the third quarter, slightly lower than expected, bringing the total year to date to £4.3bn, while we also saw an increase in PPI provision of £1.4bn.
The £608m came on top of the £3.7bn set aside in the first half of the year, a fall of 63 per cent from the second quarter, with the bank saying that the second half of the year in terms of provisions is likely to be lower than that seen in the first half.
“As we navigate our way through this latest lockdown, there is a risk that the optimism we saw back in October may well have been misplaced, and that we could see an increase in provisioning,” Hewson said.
“On the plus side if the recent performance of US banks is any guide, along with the recent steepening of the yield curve, the investment banking division could well help offset any underperformance in its retail operations, with any outperformance offering an insight into when management might look at reinstating the dividend,” he added.
NatWest – Full year results (Friday)
Hewson said it has been “a roller-coaster start” for new CEO Alison Rose this year as she looks to steer the rebadged bank into the next decade.
“While Rose has done a good job of giving the bank a makeover and given the paintwork a bit of a buff up; unless you fix what’s under the bonnet, you’re still left with the same old banger underneath,” he observed.
In September last year, the NatWest share price hit fresh record lows, but since then the shares have rebounded strongly to a post pandemic high, as the prospect of a resumption of dividends and a decent set of quarterly numbers showed that the pessimism priced into NatWest’s share price was, as Hewson called it, “probably a little overdone.”
The past 12 months has been one of damage limitation with the concerns about a Brexit deal, along with the pandemic and all of the problems that has brought about. The bank set aside impairments of £801m in the first quarter, and an attributable profit of £288m, following that on in the second quarter with impairments of over £2bn, and Q3 of £254m.
NatWest said it expects full-year impairments of between £3.5bn and £4.5bn, which suggests to Hewson, on the basis of the previous numbers, that “we could well come in in the middle of that given the tighter restrictions that have been in place since November.”
On the wider concern regarding its margins NatWest has the thinnest in the UK banking sector at 1.65 per cent so he pointed out that shareholders will be hoping for an improvement there, given how the yield curve has steepened over the last three months. “Despite the rebound from its record lows in September the shares are still over 25 per cent lower from where they started 2020.”
UK retail sales for January (Friday)
Since the April lockdown last year UK retail sales growth saw 6 consecutive months of gains, however these came to a shuddering halt in the November numbers due to the lockdown restrictions that were put in place in November, with a decline of -3.8 per cent.
“A large part of the reason for the November decline was probably due to some pull forward effect to October as consumers tried to do all their pre-Christmas shopping before the lockdown began due to concerns it might get extended up until Christmas,” explained Michael Hewson, chief market analyst at CMC Markets UK.
“The biggest drag to retail sales came from closing bars and restaurants which saw big declines in spending there, though as recent retail numbers have shown the boom in on-line and digital sales has helped compensate,” he added.
In December, the sector got a rebound of 0.3 per cent, which Hewson called “a little disappointing”, given the brief two week unlock at the beginning of the month which saw consumers go on a pre-Christmas spending binge before restrictions were tightened again.
With a new lockdown imposed in January the outlook for the beginning of 2021 is likely to be on the weak side as consumers hunker down for the long haul towards Easter, with expectations of a 1 per cent decline.
“With the Bank of England expecting to see a 4 per cent contraction in Q1, due to the tighter restrictions, January retail sales could well give an early feel as to how consumers feel as 2021 gets under way,” Hewson said.
UK CPI for January (Wednesday)
In recent months these numbers have fallen below the radar a little, Hewson said. However, given the sharp rise in 10-year yields in the past month in the US, as well as here long-term inflation expectations have been rising since the end of last year.
“A combination of a large-scale fiscal expansion in the US, alongside additional fiscal support here in the UK in next month’s budget have sent US and UK yields up to their highest levels since before the pandemic, as concerns grow that all of this extra liquidity, along with an economic re-opening could see an inflationary spike,” according to Hewson.
The UK 10 year briefly edged above 0.5 per cent on 8 February for the first time since late March last year, and while it has slipped back since then any sign that inflationary pressures are starting to build up in the system could prompt concerns about a sharp rise in prices.
“This isn’t expected to manifest itself in this week’s January numbers, however the headline CPI numbers could start to get more interesting as the year progresses,” Hewson noted.
Expectations are for UK inflation to slip back to 0.5 per cent from 0.6 per cent with core prices also set to decline to 1.3 per cent, from 1.4 per cent.
UK public sector borrowing (Friday)
The success of the UK’s vaccine rollout program is increasing speculation around the timing of a paring back of the emergency measures that the UK government has been taking in helping to support the economy, over the course of the last fiscal year.
Hewson pointed out that “it is no secret that Rishi Sunak would rather rein back on the extraordinary support measures sooner rather than later, however, it remains highly likely that it will be quite some time before normal service is resumed, with the likes of hospitality unlikely to return to pre-pandemic levels of activity until next year at the earliest.”
This focus on the public finances, and the growing levels of public debt is certainly a concern, however it is also a distraction to the wider issues facing the UK economy.
“It is true that borrowing is already at a post war record, and that it will continue to go higher, however with gilt yields still well below 1 per cent long-term borrowing costs still remain very low,” he added.
In December the government borrowed £33.4bn, and with the UK economy locked down for most of January, as well as the rest of the first quarter, this figure is set to move well above £300bn by year end, with expectations for another £20bn or so for January, due to some year-end tax payments ahead of the end of year tax deadline.
“This shouldn’t be a problem if the UK government behaves in a sensible fashion given everyone else is in the same boat, and that the appetite for longer term debt appears resilient, if last month’s 50-year French bond auction is any guide after it got €59bn worth of bids,” Hewson said.
US retail sales (Wednesday)
After a decent recovery in the aftermath of last year’s April lockdown US consumer spending rebounded quite strongly as the US consumer spent their stimulus cheques, and the economy showed a strong improvement through the second and third quarter.
Hewson pointed out that this growth started to slow quite markedly in Q4, as the expiry of certain unemployment benefits, uncertainty over the US election, along with the imposition of tighter coronavirus restrictions started to weigh on consumer confidence.
This consumer slowdown, along with the political deadlock on Capitol Hill over a stimulus package, saw retail sales in November and December slide back quite sharply, by -1.1 per cent and -0.7 per cent respectively. Since then, the economic data has picked up markedly, helped in some part by the new $900bn stimulus plan that was agreed at the end of last year, and expectations over another $1.9trn later this quarter.
“This optimism is likely to translate into a rebound in consumer confidence and ergo a possible rebound in consumer spending, after a disappointing Thanksgiving and Christmas spending period,” Hewson concluded.