Many investors assume that all UK Index Banks are the same and their share prices move in lockstep. Invest in one, invest in the other, what’s the difference? Today is a great example of a trading session that proves nothing could be further from the truth. Some of the blue-chip Banks are rallying (RBS), others are flat as a pancake (Lloyds, Barclays) while the rest are getting something of a pummeling (a tough day for those long HSBC). Why are banking shares being tugged in opposite directions? Let’s unpack the recent share price moves and major catalysts.

The prime reason why UK Index Banks are enjoying an uptick of volatility is the announcement from Brussels that EU and UK negotiators agreed to a draft text of the Brexit agreement. Many hurdles remain (27 individual EU leaders need to approve the text before Sunday’s summit, then both the UK House of Commons and the European Parliament need to vote the text into law), but the markets are viewing this latest draft as a positive step toward avoiding the dreaded “No-Deal” scenario.

With an orderly Brexit within reach, Banks, Financials and other risk/growth assets surged on the news, based on the assumption that more certainty with regards to a UK/EU post-Brexit services relationship is good for business.

So, why is HSBC down as much as 1.6%? Shouldn’t it rise with its sector peers? Not so fast. When the rest of the Banks fell last week, when the draft agreement was unveiled and Brexit Secretary Raab resigned, RBS fell 9.6%, Lloyds -5% and Barclays -4.1%. Those are all on-shore UK banks, their business highly domestically exposed.

HSBC, however, does a significant portion of its business in Asia, meaning its shares actually rose 2% on 15 Nov and are falling today. HSBC may trade on the UK Index , but the fundamental nature of its business means it is decoupled from its peers in terms of share price moves, more sensitive to US-China headlines than Brexit.

And what about the domestic UK banks? Why is RBS trading as high as +4%, while Lloyds and Barclays are holding just shy of flat? Shouldn’t positive Brexit news help them bounce too? The reason for the divergence is four-fold.

• RBS is 62.4% state-owned (remember the 2008 bailout?) and although the UK government is trying to reduce its stake, the bank is still more sensitive to political headlines than its peers.
• Politically, strengthening of PM May’s position is good for Banks, as there is less of chance of a Labour government overturning the re-privatisation of RBS and introducing less bank-friendly policies.
• RBS was recently removed from the list of global systemically-important banks, meaning it now faces less strenuous capital requirements and has additional reasons to celebrate.
• Finally, RBS shares were hurt the most during last week’s Raab-pocalypse (down 9.6% vs. down 4-5% for its peers). If all the banks reverse their declines, it stands to reason that RBS will be bouncing back by more.

Is today’s volatility among UK Index Banks a sign of things to come? Will we see more big share price moves as the Brexit story rumbles on? Going forward, the key thing for investors would be to decide which side of the fence they sit on.

Do you believe that the Brexit agreement will sail through Sunday’s EU leaders’ summit and then through the UK/EU legislatures in the weeks that follow? Or do you see more hurdles ahead? Whichever side of the debate you subscribe to could influence whether you feel inclined to have exposure to domestically-focused banks, or those with more international operations.

Whatever your opinion on Brexit and UK Index Banks, Accendo’s crack team of brokers and analysts is here to support your trading with daily opportunities, personal briefings and analysis of the latest political and financial headlines. If this is something you’d like to benefit from, go ahead and sign up for our daily trading opportunities.

Artjom Hatsaturjants, Research Analyst, 22 November 2018