Diverging Fortunes For UK Banks
Faraday Research | Feb 23, 2017 01:14PM ET
Surging profits for both Lloyds (NYSE:LYG) and Barclays (NYSE:BCS_pd) made headlines this week. Let’s delve deeper into their respective earnings updates and assess the short-term outlook for each.h3 Dividend Surprise From Lloyds/h3
Currently 2 years into a 3-year restructuring plan, the bank continues to cut operating costs and increase its capital buffer. Despite the earnings update revealing a modest fall in revenue and net interest income, Lloyds’ quadrupling of last year’s net profit to $2bln catches the eye. A key driver behind this turnaround has been the sharp decline in provisions for customer compensation.
Notably, Lloyds’ strong capital generation enabled the bank to announce a 50p special dividend. This caught analysts by surprise as most believed that the recent acquisition of MBNA’s UK credit-card division would preclude it.
Following Wednesday’s update, prices gapped decisively higher at the open and closed the day up 4.39%; the shares printed -0.22% today.
Tying Wednesday’s price action to the chart is where it gets interesting.
If we look back to the start of the year, we can see that the shares have formed a series of bullish-swing lows, each higher than the last, forming an ascending wedge pattern.
Wednesday’s decisive breakout is a clear sign of bullish momentum and given the bank's longer-term uptrend, it is easy to argue for this rally rolling on.
However, despite the bullish backdrop, we will be waiting for the next consolidation phase before jumping on board. As all good technical traders know, trends have a statistical tendency to continue following periods of mean reversion and hence we will be waiting for just that.
h3 False Break For Barclays/h3Like Lloyds, Barclays is also going through a restructuring. Management specifying the intended closure date of its non-core division means that the bank is just months away from finishing this exercise. Accordingly, pretax profit of Barclays' core division rising 60% is of note.
Of course, group pretax profit rising from £1.15bn to £3.23bn grabbed the headlines -- litigation and conduct charges falling just over £3bn a clear driver behind this turnaround. Elsewhere, the bank upping its capital buffer by 1% to 12.4% is also key. On the back of this, hopes of the bank increasing its dividend have arisen.
So how did prices react? After threatening to breakout of its well-defined 10-week trading range, the shares failed miserably to hold on to their gains. The decisive rejection of Thursday’s intraday highs has formed a bearish false breakout pattern, a sure sign of negative short-term momentum.
Get The News You Want
With resistance holding firm, all eyes are on the lower bound of the 10-week trading range. Whether current short momentum is powerful enough to see prices break below the lower support level remains to be seen. However, should this happen, it would open the door for a significant increase in selling pressure.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.