Diverging fortunes for UK banks

Surging profits for both Lloyds and Barclays made headlines this week. Let’s delve deeper into their respective earnings updates and assess the short term outlook for each.

Dividend Surprise From Lloyds

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 banks longer term uptrend it is easy to argue the case 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.

False Break For Barclays

Like 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 Barclay’s 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 today? Well, 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 today’s intraday highs has formed a bearish false breakout pattern, a sure sign of negative short term momentum.

With resistance holding firm, all eyes are on the lower bound of the 10 week trading range. Whether current short momentum is powerful enough 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.