Investor Attention Turns to Banks
Banking stocks are in focus this week, with major UK players reporting interim results.
HSBC’s shares rocketed on Monday after the bank reported pre-tax profits of $11.1 billion for the first six months of 2010 – more than doubling last year’s equivalent profit. The global banking giant’s share price gained a little short of 4.8% to close at 677.13p on the FTSE, but the share price fell sharply on Tuesday after a bout of profit-taking.
With Barclays, RBS and Lloyds all still due to report this week, we take a look at the factors affecting the banks and examine the ways in which you can profit from volatility in the sector.
What has allowed HSBC to book such impressive profits?
During the financial crisis banking share prices came under significant pressure due to unwieldy levels of bad debt, much of which had to be written off, denting balance sheets across the sector. However, HSBC reported that bad debts had fallen sharply, easing to their lowest levels since the financial crisis.
The other major reason for bullishness in the sector is the broader global recovery. Emerging markets were a cornerstone of HSBC’s profits, but the bank saw gains across all its operating regions other than North America. The strong global recovery helped HSBC’s investment banking arm deliver over half the profits, while Chief Executive Michael Geoghegan said there was an increased appetite for credit.
Both these factors are, to a greater or lesser extent, likely to be replicated across the banking sector. Economic conditions have certainly eased, with loose fiscal policy boosting growth and generous central banks helping to plug areas of weakness. This will have helped the entire sector grow along with the broader economy. However, HSBC was already at an advantage in that it did not receive government funds, unlike Lloyds and RBS, suggesting its bad debts were not quite as crippling in the first place.
What next for the banks?
If HSBC’s sector-mates announce similarly healthy profits during the course of the week, we may see significant further upside for banks. With Lloyds, Barclays and RBS announcing results on consecutive days, starting on Wednesday, there is now a sense of expectation surrounding the reports, with analysts expecting strong profits.
However, we have already seen HSBC’s share price pare its gains significantly, falling 1.6% by 2pm on Tuesday, 3 August. The same pattern has been repeated across the banking sector, with RBS and Lloyds down 0.8% and 0.7% respectively after following HSBC’s gains on Monday.
It remains to be seen whether this is down to a perception that the banks are genuinely now overvalued, or simply a minor correction after Monday’s exuberant buying. This will largely depend whether the other major UK banks can prove, by way of impressive balance sheets, that there is still momentum in the sector.
Take a position
Whether you think earnings will continue to impress or believe that the banks have reached unrealistically inflated levels, IG Index offers a variety of ways to profit from movement in the markets – all of them tax free.*
You can spread bet on individual shares, including RBS, Lloyds, HSBC and Barclays. It is easy to go long or short, depending on whether you think the share price will rise or fall and our spreads are highly competitive.
Alternatively, it is possible to take a view on an entire sector. Dealing spreads for sectors have recently been cut by more than 50%, making a sector spread bet a highly cost effective way to profit from movement in an entire industry.
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Updated: 03/08/10
The above comments do not constitute investment advice and IG Index accepts no responsibility for any use that may be made of them.
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