UK banks preview

Will UK banks be able to live up to the positive view on the world projected in recent US bank earnings?

Source: Bloomberg

The UK bank sector continues to face a raft of problems, although none are completely unbeatable. US banks had a good season, even with the one-off hit to performance from tax reforms. Over the longer term, the sector seems confident about the outlook.

At least the risk of major job relocations due to Brexit has receded. The apocalyptic predictions heard in the wake of the vote have been conveniently forgotten, with estimates dropping from ‘tens of thousands’ to ‘thousands’, and then to ‘hundreds’. Even this may be an overestimate. Most banks will probably look to sit on their hands for as long as possible, in order to keep their options open. Certainly most firms have encountered difficulties persuading their really high earners to relocate to Frankfurt, a place seen as neither as amenable to high finance as London, nor as attractive from a lifestyle standpoint.

UK credit is perhaps the biggest worry. The consumer credit market has grown by 10% per year over the past ten years, and debt levels are now heading back to pre-crisis peaks. This was perhaps bearable without the prospect of rate increases, but we have had one already, with more likely over the course of time.

Banks will have to reduce consumers’ attraction to cheap credit, and also ensure that they have made sufficient provisions for the defaults that may well follow. At least payment protection insurance (PPI) may continue to feature less and less, although UBS still thinks another £500 million will be set aside overall.

A transition deal with Europe could help boost sentiment towards the sector, prompting some inflows into major banking stocks. This could see the domestic banks such as Lloyds and Barclays favoured over the international ones such as HSBC and Standard Chartered.

HSBC (full-year earnings 20 February)

Dip-buying has been the way to go here, as the steady rally from the 2016 lows continues for HSBC. However, upward moves have stalled of late. A recent bounce off the 200-day simple moving average (SMA) at £7.33 suggests a possible move back to £7.71, and then £7.99. Support is possible at £7.15 and then £7.05. 

Lloyds (full-year earnings 21 February)

Having fallen back from the January highs, Lloyds found support around 67.00p, with the recovery back above this level being a positive development. The next levels to watch come in at 71.00p and then 73.8p. Further declines below 67.00p bring 66.00p into play, and then down to 61.81p. An oversold stochastic suggests a bounce back could be at hand.

Barclays (full-year earnings 22 February)

Barclays' January bounce stalled at 212p, where the summer gains ran out of steam. However, an oversold reading on momentum at the beginning of February brought out the buyers, so the 206p and 212p levels are the next to watch on the upside, with 219p above this. Further declines would find support at 176p.

RBS (full-year earnings 23 February)

Of all the four banks reporting next week, RBS displays the best trend. Since the 2016 low, the shares have gained nearly 100%, with a sequence of higher lows and higher highs. The latest dip has seen the shares hover just above 270p, with a 300p and then 310p target if they rally. Below 272p, the 261p level comes into play. 

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