UK bank shares have been particularly volatile post-Brexit, with Royal Bank of Scotland Group, Barclays and Lloyds Banking Group each down 30%-40% at one point since the UK’s vote to leave the EU.
However, almost all are now at their highest point since the announcement, buoyed by better-than-expected economic data and statistics, NewsMarket reported.
However, analysts at Deutsche Bank think that the lower-for-longer interest-rate environment is clearly negative for the sector in the long term. But they think that the effects of lower interest rates for the UK banking sector are unlikely to be radically different to those in eurozone.
“In the near-term, deposit pricing is likely to compress further and faster (due to higher proportion of floating deposits vs assets),” they write. “However, once this near-term liability benefit passes, we expect to see steady asset pricing pressure (new mortgage pricing remains 50 basis points below back book), with negative consequences for net interest income and profitability.”
It says that to offset these effects sustainably in the long term, UK banks will need to drive additional volume (risking further price compression), cut costs (meaning further cost plans and charges likely) or improve non-interest income, which at present in the UK is below the eurozone average.
Downgrades and Upgrades
Royal Bank of Scotland–downgraded to sell–target price 170 pence from 200 pence. ”We think RBS is most at risk in near/medium term due to already low deposit rates, likely downgrades to loan growth, additional restructuring charges and likely lack of dividend until 2018,” write the Deutsche Bank analysts.
Lloyds Bank–downgraded to hold–target price 59 pence from 60 pence. “Lloyds should benefit in near term from falling deposit costs and potential sub-debt redemptions. However, we see risks from re-mortgage churn in medium/longer term.”
Barclays–unchanged at hold–target price 176 pence from 170 pence. “Potentially more impacted in near term (due to low deposit costs and higher proportion of trackers mortgages). But benefits are from i-bank/payments revenue diversification. Debt/pref repurchases may help earnings, though further issuance likely to dilute this.”
Aldermore–upgraded to buy–target price 188 pence from 170 pence. Deutsche thinks Aldermore stands to gain the most from the Bank of England rate cut and Term Funding Scheme.
HSBC–unchanged–target price 525 pence.
Standard Chartered–unchanged–target price 479 pence.
