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The prospect of a ‘no deal’ outcome is rising, and this is hurting UK bank stocks.
As a Brexit deadlock turns to stalemate, UK banks have borne the brunt of bearish investor sentiment.
The recent warning from Standard & Poor (S&P) over the risk of a 'no deal' Brexit has crystallised the fears of many, who have worried that the banking sector is about to be shut out of a vital market and will suffer heavily if the UK economy begins to contract.
It is this cocktail of worries that has driven the declines in bank share prices, with the sector’s steady reduction helping to explain the FTSE 100’s travails since its record high in May.
The prospect of no deal is making the sector look much less attractive. If the UK crashes out of the EU without even the loosest transition agreement, the near-term shock is likely to be unpleasant. UK growth will suffer, confidence will drop and the slowdown in lending and corporate activity will hit the sector’s earnings. Bank balance sheets have been strengthened over the years, but S&P noted that a ‘severe economic shock’ would hit the sector’s current earnings outlook and their ratings.
Meanwhile, the sector’s derivatives contracts will also be at risk unless the EU and the UK deal with the regulatory uncertainty arising from a ‘no deal’ situation. Such an outcome raises the risk of greatly increased costs, from renegotiation of contracts to potential lawsuits.
As a result, we have seen the big four UK banks all underperform even the miserable performance of the FTSE 100. Up to a fifth has been wiped off the share price of Barclays, with the others doing a little better, but double-digit percentage losses are the order of the day.
The Royal Bank of Scotland (RBS) has seen its share price drop back to the 240p area that marked support back in 2017, and through the summer of 2018. The next areas to watch are 229p and 220p, while a rebound targets 252p and then 260p.
It has been a ‘sell the rallies’ story here since May for Lloyds, with the price now in the 56p-57p zone that has been support since the end of 2016. The November 2016 lows at 51.6p beckon if a fresh sell-off below 56p develops. Meanwhile, a close above 61p is needed to break the trendline from the May highs.
The direction of travel here has been firmly lower since April for Barclays, with each rally meeting selling pressure. A potential rebound would need to clear 178p to break the sequence of lower highs. Further losses target 158p.
HSBC's price has closed below the March low of £6.30, and while a rebound might develop, it would have to clear £6.55 to break the downtrend from the August high. Even then the downtrend from the 2018 high would mark another area of resistance. Further drops target £5.91 and £5.67.
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