UK bank shares face tough outlook ahead of first-half results

Low interest rates, rising unemployment and Brexit concerns all hang over UK banks as they prepare to report first-half earnings.

Tough first-half (H1) earnings expected

When looking at banks, it is important to remember that the sector is essentially a way to play the outlook for an economy. Banks provide the credit and capital for homes and businesses, and are well-positioned to provide an overview of consumer income and spending, and the conditions for business as a whole.

UK banks, like many around the world, face a very tough outlook. The government’s furlough scheme has helped to prevent a tidal wave of unemployment for workers who have seen their businesses temporarily closed for lockdowns, and now face the prospect of permanent layoffs as business dries up.

This will hit consumer confidence and spending, and will result in further closures and layoffs unless the government extends the furlough scheme, which it is unlikely to do.

Businesses will also be less active in borrowing funds, since they have little desire to expand their operations in such an economic environment.

While some borrowing will continue to shore up finances, even this will be at lower rates thanks to the cut in interest rates by the Bank of England (BoE) to 0.1%. This is something seen in US bank earnings, where domestic-focused firms have suffered compared to investment banks which have large trading operations and have seen substantial increases in activity in these divisions.

Brexit uncertainty clouds the sector

Combined with the poor economic outlook, the sector faces huge uncertainty with regard to Brexit. This of course is a long-running problem, but with the time limit for a new deal getting closer investors will become more nervous about investing in UK banks given the potential for a major rupture in relations by the end of the year.

RBS share price: technical analysis (first-half earnings 31 July)

Royal Bank of Scotland (RBS) has seen only limited upside since the March lows, with the spike to 140p in June followed by steep losses. This was followed up by a range-bound trading pattern, with gains capped around 127p and downside held around 118p. Longer-term gains back in the direction of 140p will have to await a rally through 127p, while a drop below 115p raises the prospect of a move back to 100p.

Lloyds share price: technical analysis (H1 earnings 30 July)

Lloyds has held a rising trendline from the lows of early April, if only just. But like RBS gains have been noticeably absent, with a steady drift lower taking place since mid-June. A break below 29p would signal a more bearish view is in place, while a rally above 32p is the prerequisite for a more bullish near-term view to emerge.

Barclays share price: technical analysis (H1 earnings 29 July)

Barclays’ big investment banking division has been a key driver of its better share price performance compared to Lloyds and RBS. From around 75p in March the price hit 130p by early June. However, like these other two banks gains have stalled since then. The price has managed to hold above the rising 50-day simple moving average (SMA) at 114.8p but gains have faltered at 120p, increasing the rise of a fresh turn lower, as indicated by the downturn in daily stochastics and moving average convergence/divergence (MACD).

HSBC share price: technical analysis (H1 earnings 3 August)

The Asia-focused HSBC has perhaps the least attractive price chart of the sector, as political concerns about the future of Hong Kong result in an even gloomier outlook than that for UK-centric banks. While at least RBS, Lloyds and Barclays have held their March lows, for HSBC it has been a tale of further declines. Even small rallies such as in early June and at the beginning of July have run out of momentum very quickly. For now 370p continues to be support but it would not be surprising to see it broken to the downside in due course.

Standard Chartered share price: technical analysis (H1 earnings 30 July)

Standard Chartered's share price has taken longer to start moving higher, but since June we have seen steady gains. However, rallies above 450p have proven fleeting, although for the moment it remains above the 50-day SMA (422p), keeping a cautiously bullish outlook in place for the time being.

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