Wednesday preview: Lloyds and GDP provide insight into UK economy

On Wednesday there will two crucial insights into the health of the UK economy, with a confirmed measure of gross domestic product for the fourth quarter of last year, plus results from Lloyds Banking Group, itself also key national business bellwether.

The day after HSBC's numbers disappointed the market, more UK-focused Lloyds steps up with its divided a key focus of investors.

The consensus forecast is a 2.9p per share dividend, after the 2.25p plus 0.5p special dividend last year. Reported profits before tax are expected to hit £6.2bn and adjusted earnings 7.1p per share.

Lloyds' bank's purchase of the MBNA credit card business just before Christmas is expected to require around 0.8 percentage points in regulatory capital to be held on the balance sheet, which analyst Laith Khalaf at Hargreaves Lansdown said said makes a special dividend less likely this time round but does not rule out an increased ordinary dividend.

"Long term, Lloyds is a domestically focused stock and so its fortunes will likely reflect those of the wider UK economy, in particular UK consumers and SMEs.

"That makes it a bit of a canary in the coalmine as regards the grass roots economic consequences of the UK’s withdrawal from the EU."

Khalaf said a key metric for investors will be Lloyds’ asset quality ratio, measuring the cost to the bank of any bad loans.

In the third quarter of 2016 this stood at a very low 0.18%, but has been heading in the wrong direction.

UBS last week upgraded its EPS estimates for Lloyds to account for three supportive factors: improved loan losses as the UK economy continues to outperform expectations, a 5-7% underlying profit accretion from the MBNA card transaction, and expectations that Lloyds will reload its rate hedge in Q4 to allow it to project "a more resilient interest margin in 2018 and beyond".

While the triggering of Article 50 to begin the process of negotiating its exit from the EU nears, UBS suggested that although sentiment and sterling will continue to be volatile, it retains a very positive view on Lloyds.

"As things stand, however, consensus EPS for this bank is much too low and the payout potential too strong to ignore in our view. Though we do expect housing and commercial real estate markets to slow, we view the credit quality of the bank as sound, with earnings power defended by significant potential to further reduce deposit and branch distribution costs."

Looking at some of the other companies reporting, Barratt Developments already guided to most of its key performance measures for the first half of its 2017 financial year, therefore the key for investors will be how trading has been in January and February.

UBS said it expects sales rates to be broadly flat on last year's 0.71 sales per site per week, an update on guidance which was previously held and stands at 25% ROCE and gross margins of 20% and possibly an update of the dividend commitment, with the third and final special dividend committed for November 2017 of £175m.

For Weir, the consensus is expecting almost £990m of second half sales to bring £1.85bn for the full year, with EBITDA of £220m, £178m of pre-tax profit and 0.64p earnings per share.

Macroeconomic look

Later in the morning the Office for National Statistics will publish the second estimate of UK gross domestic product for the fourth quarter of 2016.

The first estimate came out at 0.6% quarter-on-quarter growth in real terms, but since then there have been favourable revisions to industrial production and more upbeat news for the construction sector.

Economists said it means the prospect of an upward revision to GDP needs to be considered.

However, as the preliminary estimate had an index level which translated into 0.56% to two decimal places, even with the known upward revisions, it may not be sufficient to turn into an upgrade to 0.7% q/q, said RBC Capital Markets.

While their base case remains for a final reading of 0.6%, they said, "on balance, though, we would be less surprised to see an upward revision to 0.7% q/q than a downward revision to 0.5% q/q."

HSBC said although the ONS said the improved industrial and construction data would not affect the Q4 GDP growth number, "we think it must be pretty close to pushing it up".

Furthermore, given the statistics office’s low estimate of services growth (0%) for December, HSBC believe the likelihood is that an upside surprise will tip the balance, predicting a revision to 0.7%, which will make it the strongest since Q4 2015.

ONS also provides expenditure breakdown at this stage, showing the how balanced growth has been between the domestic consumer, business investment and net trade.

The services index is also expected to slow to 0.2% from 0.3% last time, with the three-monthly number falling to 0.9% from 1.0%.

Wednesday 22 February

INTERNATIONAL ECONOMIC ANNOUNCEMENTS
Consumer Price Index (EU) (10:00)
Existing Home Sales (US) (15:00)
IFO Business Climate (GER) (09:00)
IFO Current Assessment (GER) (09:00)
IFO Expectations (GER) (09:00)
MBA Mortgage Applications (US) (12:00)
Retail sales (CAN) (13:30)

UK ECONOMIC ANNOUNCEMENTS
GDP fourth quarter final (09:30)
Index of services (09:30)

INTERIMS
Barratt Developments, Hays, Hotel Chocolat Group , Mcbride, PCI-PAL

FINALS
Capital & Counties Properties , Indivior, Lloyds Banking Group, Petrofac Ltd., Unite Group, Weir Group

ANNUAL REPORT
Lloyds Banking Group

AGMS
Bankers Inv Trust, Gooch & Housego