Defence and banks get a lift, as FTSE100 retreats from record highs

The recent decline in yields has undergone a bit of a reverse this week after hotter than expected wages and inflation data from the UK and comments from ECB governing Council member Sabine Lautenschlager that the central bank may look at a pause in its rate cutting cycle.

This rebound in yields appears to be weighing on European markets which have slipped back from last week’s record highs, and where we’ve had to absorb the possibility that mining giant Glencore is considering abandoning its primary UK listing, and exploring a listing in New York.

They certainly wouldn’t be the first miner to do so given BHP abandoned its primary UK listing 3 years ago, with chatter suggesting that Rio Tinto might well look to follow suit after calls from activist shareholders to move its primary listing to Sydney.

We’ve also seen big moves in the defence sector this week and while the likes of BAE Systems and Rolls-Royce have been getting all the headlines, we also have the likes of Babcock, QinetiQ and Chemring which could see the benefits of a pickup in European and UK defence spending in the weeks and months ahead.

Babcock carries out engineering support for ships and submarines for the Royal Navy, and helps manage naval bases, as well as defence equipment.

QinetiQ, is a science and engineering company based in Farnborough consults on cybersecurity, as well as helping to develop weapons systems like the new DragonFire laser which the Royal Navy hopes to use on its ships from 2027 to shoot down drones and missiles.

Chemring has expertise in designing sensors and detection, as well as countermeasures to protect aircraft and ships from missiles. Customers also include NASA and SpaceX.

This week has seen the full year results from HSBC and Lloyds rounding off a solid set of results for UK banks, carrying on the theme of a resilient UK banking sector.

For Q4 HSBC reported $2.3bn in profits before tax, pushing total profits for the year up to $32.3bn, a $2bn increase on the previous year, pushing the shares to their highest levels since 2006, before slipping back.

A caveat to this increase in profits should be that these numbers included a $4.8bn gain from the sale of its Canada business, along with a $1bn loss derived from the disposal of the Argentina business. A $1.6bn gain on the back of the acquisition of Silicon Valley Bank UK’s assets, and a $3bn impairment on its Bank of Communications stake completed the picture here.

Total revenue of $65.6bn was slightly lower from last year’s $66bn, as was the next interest margin down from 1.66% to 1.56%. Operating expenses were also higher, rising by 3% due to higher investment in tech.

A Q4 dividend of 36c a share along with a further $2bn shares buyback.

On a regional basis the picture was as follows,

HSBC UK saw profits before tax fall by $1bn to $7.2bn, while profits at its Asia business surged to $20.47bn from $16.1bn.

On the outlook the bank says it expects to see NII of $42bn in 2025, having seen a decline of $3.1bn in 2024 to $43.7bn, and said it is looking to cut another $300m in costs for 2025.

Lloyds Bank

We’ve seen a decent set of numbers from Lloyds Banking Group today despite a 5% fall in net income, and a 20% drop in annual profits. Statutory profit before tax fell from £7.5bn to £5.9bn, with the main drag appearing to be a 3% increase in operating costs.

For Q4, statutory profits after tax were down from £1.2bn a year ago to £700m, largely due to the bank setting aside a further £700m in respect of the motor finance scheme, adding to the £450m set aside a year ago.

Despite the overhang of possible compensation payments in respect of Black Horse Finance, the shares have continued their recent rebound from the recent lows to nudge closer to the highs of 69.9p last seen in December 2019.

On the business itself there doesn’t appear to be anything to cause alarm at the moment.

Loans and advances to customers are almost £10bn higher than a year ago at £459.1bn, while customer deposits are also higher at £482.7bn, up from £471.4bn at the end of 2023. Net interest margins are slightly lower from a year ago, at 2.95%, although they are slightly higher on a quarterly basis probably due to the recent move higher in gilt yields.

On the dividend, the bank has raised this to 2.11p per share, pushing the total dividend to 3.17p, an increase of 15% as well as announcing a share buyback of £1.7bn, not the actions of a management who appear to be concerned at accruing further costs from its Black Horse Finance operation.

For 2025 the bank says it expects Underlying NII to rise to £13.5bn, while expecting operating costs to rise to £9.7bn, up from £9.4bn.