Thursday, September 28th 2023

UK Banks “Boom or Bust”

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Are the big four UK banking stocks worth a buy?

Despite a minor lift on Friday, banking stocks have taken a hit this week thanks to a perfect storm of geopolitical and regulatory concerns. This week’s problems prolong a disappointing start to the year for the UK’s big four banks- does this weakness offer a good opportunity to buy?

As at the time of writing, HSBC’s shares have fallen by 0.8pc to 729p this week and are down 4.7pc so far this year while RBS is down 3.5pc this week to 279p and down 7.6pc from highs of 302p hit in early January. Meanwhile, Barclays has dropped by 2.4pc to 201p this week, and Lloyds is down 3.5pc to 63.4p, recovering some losses after hitting its lowest price since September earlier in the week.

Financial names have been hit across the board this week by political turmoil and the rise of Eurosceptic parties in Italy, although this had eased slightly by Friday. Fears that the country’s potential future leaders will stop following the rules of the euro raising concerns around the currency’s fragility and the future of Italy’s debt, which is owned by banks around the world.

Ongoing fears around the over-regulation of financial institutions were also reignited this week after the Financial Conduct Authority announced a crackdown on high-cost lending to protect vulnerable consumers. Another fear more specific to the big four high street banks this week has been RBS’s myriad of problems.

At its AGM, the 72pc UK taxpayer-backed bank told shareholders it would press ahead with branch closures due to a sharp falloff in usage as customers shift to digital banking. This move sparked concerns among shareholders that vulnerable customers will have no way to access their money.

RBS chief executive Ross McEwan said he was aware of these issues but digital banking usage had been ‘much more dramatic than I would have expected’. McEwan’s surprise and the unexpected effects online banking has had on RBS raise questions about the future of retail banking more generally and has left the market wondering how other high street banks will fare.

Finally, there is the ongoing issue of monetary policy that has hampered financial stocks so far this year. After hiking rates last November to 0.5pc, the Bank of England defied analysts expectations of further increases this year to leave rates unchanged, leading many to label governor Mark Carney an ‘unreliable boyfriend’. Generally speaking, this has not been particularly good for banking stocks, which tend to benefit when rates are increasing because it boosts their profits margins and encourages saving rather than spending among consumers.

So why buy?

One argument would be that all of these problems are negligible in the grander scheme of things.  Indeed, geopolitical concerns usually waiver, the UK banking sector will soldier on, and monetary policy will continue on the road to normalisation over the long-term. If you take this view, then whether or not you think the recent weakness in the share price of the big four banks is worth taking advantage of really comes down to your belief in their fundamentals.

Many would argue that the big four look far healthier than they did before the financial crisis. Regulators have enforced restrictions that ensure banks ring-fence their retail arms, pay an annual levy to discourage risk borrowing, keep a buffer on their balance sheets for times of stress, and limit bonuses. A more extensive list of recent changes in the banking sector can be found here.

A recent survey from Bank of America Merrill Lynch even found that professional managers were more heavily invested in bank shares than in any other sector, relative to historical averages. Whether or not you follow them as a private investor is up to you – but with financial stocks already recovering partially on Friday, there may not be much more time to take advantage of current weakness.

You can watch ITV recent report in the short clip here, dated 30th May 2018

The author was remunerated but does not hold shares in the companies mentioned