Depositing Further Gains?

Alongside housebuilders, UK financials also received a bruising at the hands of the referendum result. Due to Britain’s banks being a key driver of the UK economy, the economic uncertainty provided impetus for investors to become increasingly worried about future prospects. However, the banks have also shown an impressive rebound since their lows in the weeks following Brexit. The table below shows just how well the blue chip banks have fared in the interim. All five have offered bounces of greater than 20% from Brexit lows, with two (HSBC and Standard Chartered) even trading higher than before the vote.

These two Asia-exposed financials, rank outperformers in July and August thanks to the high growth markets in China and other emerging economies, have now had their rebounds overshadowed by the UK-focused banks as a British strikeback emerges amid improved UK economic prospects.

Barclays is leading the British pack thanks to its own global presence, therefore enjoying at least some of the benefits that the Asian-focused banks do, with RBS close behind. Lloyds Banking Group has the biggest mortgage book in the UK, so with the outlook for UK house sales more positive than expected, one can understand its shares pricing this in.

Lowering Interest, Increasing Demand?

Worth considering is the impact of the Bank of England’s monetary policy decision in August to lower interest rates to an all-time low of 0.25% on the two darlings of the recovery. Whilst Mark Carney shrugged off suggestions that he overplayed the financial impact of Brexit, the impact of measures undertaken may well have been all that was required for the UK economy. A raft of solid macro data in the form of August UK Retail Sales and those stellar PMI survey rebounds mean that this could increasingly be the case. If no more rate cuts are required, banks’ net interest margins should feel no further pressure. In turn, they should feel more inclined to lend (at higher rates than it pays on savings) to maintain profits. Good news for shareholders.

If the banks are more inclined to lend to businesses doing well, as well as aspiring homeowners, mortgage approvals should remain solid, therefore supporting house prices and housebuilders, even before government incentive schemes are considered. A mutually beneficial scenario for both of these key sectors. Importantly though, the banks may see this as an opportunity to recuperate some of the losses of the Brexit sell off and choose not to pass on the benefit.

Results Season: More Positive Surprises?

Earnings season is always an exciting time. Q2 bank results in late July and early August provided for some mixed shareholder reactions as the Brexit topic overshadowed, however, importantly all the blue chip shares sit higher since. Given that outlook was so key post-Brexit and that markets are now much more laid back with regards to the issue, could positive Q3 financial results be back in the driving seat? Does the recent positive UK macro data mean that outlook fears have subsided?

If the potential is there for the banks to achieve and surpass highs of the past 18 months an upside of 15% to 110% is available, providing a very good reason why investors should keep an eye on the sector for a continued recovery. However, with the uncertainty surrounding the true impact of the vote to leave the EU still in the air, will a surprise announcement of decreased earnings from banks (already confident of better-than-expected results) provide a reason for investors to cash in on their positions sooner rather than later?