The Week Ahead: Updates due from Lloyds Banking Group, Royal Bank of Scotland, Home Retail Group and Whitbread
- Credit: PA
The contrasting recovery fortunes of part-nationalised banks Lloyds and RBS will be examined this week during a busy few days for City updates.
State-backed Lloyds Banking Group will on Thursday deliver its first trading update since the Government reduced its stake in the business to 25% by raising £4.2billion from the sale of more shares last month.
The stock was placed with institutional investors, with a further multi-billion pound shares offering to members of the public expected to take place later in the year.
The value, which peaked at more than 80p earlier this year, has been falling since the latest placing when shares were sold at 75.5p, and they dipped near to 70p earlier this month.
But analysts at Nomura have upgraded the stock to buy in the wake of the share price fall, raising the target price to 89p and saying Lloyds was on track to be the highest yielding UK bank with a strong capital position.
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Taxpayers were left with a stake in Lloyds after its £20bn rescue during the financial crisis but this has been reduced by the latest disposal, following on from a previous £3.2bn placing last September.
Chief executive Antonio Horta-Osorio confirmed in February that he would take a £1.7million shares bonus and hand out £395m to staff after the group posted its first bottom line profit, of £415m, for three years.
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It came despite pressure to cut bonuses after it was left counting the cost of past misdemeanours, including another £1.8bn in provisions for the mis-selling of payment protection insurance (PPI).
Analysts at Morgan Stanley expect first quarter results to show growth in core loans, a slight improvement in margin and underlying profits up 24% to £1.8bn.
They also expect no further top-up to PPI provisions given the recent charge.
Troubled Royal Bank of Scotland publishes a first quarter update on Friday following annual results earlier this year that showed it had tumbled to an £8.2bn loss.
The figures come in the wake of the announcement that the Government had scuppered its hopes of paying bonuses twice the size of salaries.
Keith Bowman, equity analyst at Hargreaves Lansdown, said the group’s transition back to a UK-focused bank was likely to remain the central theme of the update.
He said additional provisions for past misdemeanours looked “unlikely though not out of the question” as the relatively new chief executive, Ross McEwan, could still be eager to remove possible future bad news.
For 2013, the group’s balance sheet was crippled by the £4.8bn cost of creating an internal “bad bank” to hive off toxic assets, as well as further charges for scandals and litigation including payment protection insurance mis-selling.
The annual results, published in February, confirmed there was no hope of an imminent return to the private sector for the group, which remains 80% owned by the taxpayer after its rescue during the financial crisis.
They also saw Mr McEwan pledge a mammoth overhaul to slash costs by £5bn within three years and shrink the group from seven divisions to three, and warn of further job losses. But there was anger as the bank also revealed a £576m bonus handout to staff.
It was a far cry from the optimism of 2013’s first quarter results, when RBS said the Government should be able to start selling off its stake within a year as it reported its best quarterly profit since 2011.
There have been some more positive recent developments, with a report from law firm Clifford Chance finding no evidence that it set out to defraud small business customers, following allegations in a report by a Government adviser.
However the bank said it was continuing to co-operate with an ongoing review with the Financial Conduct Authority into how it works with distressed firms.
It has also announced the appointment of a new finance director, Ewen Stevenson, who will take over from Nathan Bostock after he abruptly said that he was quitting last December after only two months in the job.
Analysts at Morgan Stanley expect to see operating profits of £900m for the first quarter, up slightly on last year, but the bottom line dented by restructuring charges of £500m.
Away from banking, Argos owner Home Retail Group reports full-year results on Wednesday after a buoyant trading update last month when it hiked City profit hopes for a second time this year.
The figures will be the first under new chief executive John Walden, who took over at the helm from Terry Duddy on March 14.
Mr Duddy left the retailer on a high note, with a final update to investors revealing that profits for the year to March 1 would be slightly ahead of market expectations of £111m.
Home Retail, which also owns DIY chain Homebase, had previously upgraded forecasts in January after Argos enjoyed its best Christmas performance for more than ten years, driven by further progress in its drive to become a digital-led retailer.
A makeover has scaled back the print version of the Argos catalogue, alongside plans to close or relocate at least 75 stores over five years.
Argos’s like-for-like sales increased by 5.2% in the final eight weeks of the financial year, with demand particularly strong in video gaming, TVs, small domestic appliances and white goods.
Like-for-like sales at Homebase increased by 9.3% in the eight-week period, driven by further growth in big ticket sales such as kitchens and bathrooms.
Cantor Fitzgerald analyst Freddie George said he was impressed with the new Argos store format, and lifted profit expectations for the year to £112m, which would be a 23% increase on the previous year’s £91m.
Keith Bowman, equity analyst at Hargreaves Lansdown stockbrokers, said: “Home Retail remains well placed in terms of capturing the UK economy’s unfolding recovery.”
Costa and Premier Inn owner Whitbread is expected to deliver a 12% rise in annual earnings on Tuesday, after a recent strong trading performance.
Analysts on average expect pre-tax profits to rise to £397.9m, after City forecasts were lifted in the wake of the group’s latest update.
It reported like-for-like sales growth of 6.8% in the 11 weeks to February 13, driven by a strong Christmas and favourable weather comparatives a year earlier.
Coffee shop chain Costa saw underlying sales growth of 7.3%, while budget hotel brand Premier Inn improved 8.3% and the company’s Beefeater and Brewers Fayre restaurants achieved 4.4%.
The strong quarter meant that sales in the 50 weeks of the financial year to date were 13.2% stronger, or 4% on a like-for-like basis.
It prompted chief executive Andy Harrison to assure the City that Whitbread was on course to deliver full-year results at the top end of expectations.
Numis analyst Wyn Ellis said growth momentum in late 2013 and early 2014 in the UK hotel market would continue to benefit the group in the new financial year, “driven by improved economic prospects and a pick-up in corporate travel”.
Mr Ellis expects a further rise in revenues per room at Premier Inn for 2014-15 and said he was positive on the prospects for further strong like-for-like growth at Costa.
However analysts at Panmure Gordon said Premier Inn and the group’s restaurants were continuing to underperform compared to rivals and that consensus forecasts for 2015 earnings growth were too optimistic.