CFDs are leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your deposits, so please ensure that you fully understand the risks involved. CFDs are leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your deposits, so please ensure that you fully understand the risks involved.

US bank shares earnings grow, but yields highlight potential catch up for UK banks

US banks have kicked off earnings season in style, but relative yields point towards a possible catch up for UK banks.

US banks could kick off earnings season with a bang

Today sees the US banks kick off quarter one (Q1) earnings season in the region, with strong numbers from Goldman Sachs, Wells Fargo, JPMorgan Chase highlighting the potential strength we could see in the sector over the coming days. Undoubtedly, US banks have significantly outperformed their counterparts over the years, thanks to a number of factors.

For one thing, the US banking sector involves a significant amount of investment banks, meaning that they can typically generate good revenues from trading even when the retail side of the industry struggles with low margins or economic strife.

In the UK we have seen significant anxiety over the potential impact Brexit might have upon the economic growth in the region. While we are yet to quantify exactly how much Brexit has impacted the country, there is no doubt that we have seen much of the fear around the event overshadowed by the pandemic. Instead, the UK is deemed to be outperforming mainland Europe based simply on relative vaccination efforts.

As such, a cloud has been lifted that has loomed large over the UK economy in recent years. That build up in fear around Brexit can be seen below, with the differential between the UK and US 10 year yield growing as we approached the deadline. However, we have now seen that relationship normalise somewhat, reflecting growing confidence in the UK economy.

Will UK banks follow improved attitudes towards UK growth?

The UK economy has been viewed in a more positive light following the swift vaccination efforts seen over the course of the past few months. Rapid inoculations against Covid-19 have helped to alleviate fears over further waves of lockdowns.

Meanwhile, Chancellor Rishi Sunak’s supportive stance has helped to stave off much of the catastrophic outcomes that would ordinarily result from such a long shut down.

The ability to avoid widespread losses for employer and employee alike brings benefits for banks that had set aside billions as loans go bad. However, we have seen UK banks lag well behind their US counterparts in what looks to be a continuation of the wider long-term trend. The chart below highlights how UK banks have continuously underperformed against their US peers, with the trend showing little signs of turning around yet.

However, that chart also highlights that same catchup in UK yields, reflecting growing confidence in the economic recovery relative to the US. By overlaying the two lines, with can see that recent months have seen a major disconnect between perceived economic strength and the performance of US vs UK banks.

With that in mind, perhaps UK banks are due a strong rebound as the dust settles to find banks in relatively good shape and Brexit anxiety in the rear-view mirror. Whether we see US economic outperformance drive yields dramatically higher to lift the relative yields line, or UK banks start to play catch up remains to be seen. In any case, it seems the perception of relative economic strength on the treasury markets are disconnected from banking sector performance of late.

From a wider perspective, the monthly chart highlights the long term descending channel seen in the decade leading to the pandemic. It is noticeable that the sector suffered in the years leading up to the Brexit deadline.

However, with the uncertainty around Brexit finally dissipating, there is a chance we could see this market target a move back towards the upper threshold of that decade-long channel.

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