UK Bank Shares – The Brexit Effect

The UK’s vote to leave the EU has of course rocked the stock markets. However, the UK 100 is now about 7% higher than it was at the close on 23 June. The rally has been led by precious metals miners and big multinationals that book revenue in US Dollars, and have thus been re-valued by the markets on account of a much weaker GBP.

Those that have been left behind include the house builders, travel stocks and of course the banks. We will focus on the latter in this special report because the banks are most sensitive to what the Bank of England may do to stimulate the UK’s economy in a pre-emptive strike against what many are expecting to be a coming Brexit–inspired recession. They are also some of the stocks with the best recovery potential on the index given that, in similar vein to the defensives, they will always be needed by people and businesses that want to grow and invest for the future via both savings and credit.

How Have the UK’s Blue Chip Banks Fared Post-Brexit Vote?

The above table details how the five blue chip banks have fared since the Brexit vote. Note all have bounced by up to 33% from the lows after the vote.

It’s no surprise at all to see the Asia-focused lenders HSBC and Standard Chartered outperforming, since they have a lot of exposure to the high growth markets in China and other emerging economies, meaning they can re-position themselves with relative ease.

Neither is it a surprise to see Barclays at number three – not only is it the only UK based blue chip bank not to have been bailed out by the tax payer following the 2008 financial crash, it also has a tremendous global presence and so can enjoy at least some of the benefits that HSBC and Standard Chartered do.

Lloyds Banking Group, which is after all a penny stock these days, is joint number four with Royal Bank of Scotland. The still part-taxpayer owned lender has the biggest mortgage book in the UK. A lot of people owe it a lot of money, so with the outlook for UK house prices still quite murky, one would expect Lloyds’s shares to be pricing this in. What if house prices don’t fall by 20%? What if they stay the same, or even go higher as things generally do when demand outstrips supply?

The Central Bank has begun to act

On Thursday 4 August, the Bank of England cut UK interest rates to 0.25% – a record low. Low interest rates are bad for banks because they impact their profit margins. However the banks were thrown a lifeline in the form of an expansion of the Funding for Lending scheme (FLS) which is designed to incentivise lending instead of penalising those who don’t lend. This served to offset any negative impact from lower interest rates and is a sign that Mark Carney and Co. are all too aware of the position banks find themselves in today. They are essential for economic growth after all.