TheChek News Flow

We expect Lloyds (LLOY) to make a 14.2% ROTE in 2018 on required capital using a 14% CET1 threshold. A target multiple of c1.61x P/TB or c11.3x P/E suggests rerating potential of c20%. We see TBV growth of 6% by 2018 after taking a conservative incremental charge of GBP 1.5bn for PPI and GBP 0.6bn for other litigation. We now expect cumulative DPS of 18p by 2018 (including 4Q15 DPS of 2p) or a yield of 26%. Thus, we see total upside of just over 50% by 2018; this is despite building CET1 capital to 14.2% and lowering NIMs to 2.65% by 2018, suggesting further upside if one wants to be more bullish. 

Our bull case on Barclays (BARC) was built on recovery of a smaller Core Investment Bank (IB). With management more willing to ride out the depressed earnings environment for IB, business mix reduces medium-term profitability to below cost of equity (COE). While we move to Neutral, we do see upside, especially if IB revenues recover cyclically. That said, cost and structural reform headwinds will remain material. We therefore recommend that investors use any material rallies from current levels to reconsider their positions in the stock. 

Nomura expects China GDP of 5.8% in 2016, falling to 5.6% in 2017 (consensus is at 6.5% for 2016 and 6.2% for 2017). We expect further RMB devaluation, which will likely be accompanied by broader emerging market (EM) forex weakness. We also expect asset-quality trends to continue to deteriorate in Asia. STAN’s business model faces structural and cyclical headwinds in wholesale banking and sub-scale operations in retail banking. In the face of increasing asset-quality risks, we see the group facing a difficult restructuring. With the stock price c23% off its lows, we take the opportunity to downgrade the stock to Neutral. STAN’s capital position is not as bullet proof as it looks as it faces risks from further negative credit risk migration (c6% pa since 2012), RWA inflation and IFRS 9, which could hit CET1 by c250bp before any further asset-quality shocks. We are c25% below on 2017E EPS. 

We turn cautious on HSBC because we expect revenue headwinds in a challenging macroeconomic environment. While we believe it has strong underwriting standards relative to peers in Asia, the macroeconomic headwinds will still mean elevated loan losses. We expect HSBC to underperform European banks, even though it could become defensive in an Asian context. We are c6% below consensus on 2017E revenues and c11% below on 2017E EPS. While risks to dividends are increasing, we do not yet expect a dividend cut. 

While restructuring the group is taking longer than the market expected, RBS is slowly but surely reaching end-state profitability of >12% ROTE. However, litigation remains a key uncertainty, so we retain our Neutral rating. We move to Neutral on domestic UK banks and Underweight on Asia-exposed UK banks relative to European banks.