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Barclays, U.K. Banks May Predict Recovery, Mortgage Rebound

Nov. 28

(Bloomberg)

U.K. lenders including Barclays Plc and Royal Bank of Scotland Group Plc, among the worst-performing bank stocks in Europe this year, may try to ease investor concern that rising loan defaults will curb profitability.

British banks, which reported stagnating domestic profits in the first half, this week will begin updating investors on business in the third quarter and the outlook for the rest of the year.

``The banks have been more confident on the economy and have played down the influence of consumer bad debt,'' said Michael Helsby, an analyst at Fox-Pitt, Kelton Ltd. in London. ``People are beginning to get more comfortable with the housing market.''

The Bank of England in August cut interest rates for the first time in more than two years, helping a recovery in third-quarter consumer spending. Banks approved more home loans for a third straight month in October, suggesting a yearlong slowdown in the $6 trillion property market may be ending, according to the British Bankers' Association.

``The authorities may have engineered a soft landing, without a collapse in the housing market,'' said Colin Morton, who helps manage $1.1 billion at Rensburg Fund Management in Leeds and owns fewer U.K. bank stocks than other shares on the benchmark FTSE 100.

The 10-member FTSE 350 Banks Index gained 6.6 percent this month through Nov. 25, outpacing the Bloomberg Europe Banks and Financial Services index, which advanced 6.3 percent. It was the first month in five that the FTSE 350 Banks has done better than the European index.

Barclays First

Barclays, Britain's No. 3 bank by assets, may benefit in the second half from higher revenue at its Barclays Capital securities unit. The London-based lender, which posted a 2 percent increase in first-half net income to 1.84 billion pounds ($3.2 billion), is the first U.K. bank to update investors on business on Nov. 29.

Earnings from U.S. and European investment banks suggest Barclays Capital will show ``strong'' revenue, said Keefe Bruyette & Woods Ltd. analysts Mark Thomas and James Hutson in a Nov. 25 note. Barclays may still show a ``deterioration'' in provisions for doubtful debt at the credit card business, the analysts said.

Shares of Barclays have gained 3.8 percent this year ranking the stock seventh-worst on the 78-member Bloomberg Europe Banks index, which advanced 20 percent. Royal Bank's stock has been the second-poorest performer, falling 2.7 percent. Five of the 10 worst stocks on the index this year are British lenders.

``I'm underweight on the banks because I'm concerned about the slowdown and the credit situation,'' said Morton of Rensburg.

Shares of banks such as HSBC Holdings Plc and Standard Chartered Plc, which make most of their profit outside the U.K., have so far this year outperformed rivals.

HSBC Storms

HSBC, Europe's biggest lender by market value, owns banks in the U.S. and Asia and gets about a quarter of profit from the U.K. Pretax profit in Britain, which accounted for 18 percent of the total in the first half, fell to $1.93 billion in the period from $2.2 billion a year ago, HSBC reported in August.

Shares of the company, which updates investors on business on Dec. 1, gained 8.1 percent this year. Shares of Standard Chartered, which makes two-thirds of profit in Asia, have jumped 32 percent.

In the second half, HSBC's business may be crimped after Hurricane Katrina caused consumers to default on payments and bankruptcies increased. Profit at the bank's U.S. commercial and consumer lending units fell 8.9 percent to $688 million in the third quarter, hurt by $139 million in costs related to the storm as people who lost homes and jobs couldn't keep up payments, HSBC said Nov. 14.

The U.S. consumer finance unit may take a $200 million pretax charge in the fourth quarter because of a ``spike in bankruptcies'' in the run-up to new U.S. bankruptcy legislation, HSBC also said.

Royal Bank

Shares of Lloyds TSB Group Plc and HBOS Plc, the most focused on Britain among the top five U.K. lenders, rebounded this month. Lloyd's TSB's stock gained 9.6 percent since Oct. 21, when it closed at its lowest of the year. Shares of HBOS, the biggest U.K. mortgage bank, rose 6.9 percent over the same period.

``HBOS and Lloyds should continue to benefit from a revival in long-term savings and investments business,'' said Fox Pitt- Kelton's Helsby.

Shares of Royal Bank dropped 4.4 percent Aug. 4, their biggest decline of the year, when the Edinburgh-based lender posted first- half earnings that showed a decline in U.K. consumer lending income. Investors have also been concerned about whether the bank may seek more takeovers that don't benefit shareholders, Merrill Lynch & Co. analyst John-Paul Crutchley said in an Oct. 21 note.

``Sentiment is poor'' toward the bank, he said. ``The issues holding back the stock will dissipate over the next 12 months.''