Torrid year for UK banking shares

What does the chart show?
The data show that shares in the four largest UK-listed banks by market capitalisation have suffered during the past 12 months. In fact, three of the top four — excluding Royal Bank of Scotland — are each trading at a near two-year low, or around post-EU referendum depths. However, state-backed lender RBS has been the worst performer during the past year, with the shares down about a fifth over 12 months.

Why have the shares performed so badly?
Brexit-induced jitters have played a part in turning investors off Lloyds, RBS and Barclays, which have the biggest exposure to the fortunes of the UK economy. Meanwhile the threat of a raging trade war between China and the US has dented investor sentiment towards emerging markets, and in turn HSBC, which earned three-quarters of its underlying pre-tax profits from Asia during the first nine months of the year.

However, some of the lenders’ problems have been more idiosyncratic. For instance, Barclays has been battling investor scepticism towards chief executive Jes Staley’s focus on investment banking, which has delivered a patchy performance in recent years. However, Mr Staley has received some vindication for his strategy during the third quarter, with equity trading income jumping 35 per cent during the third quarter and fixed income revenue up 10 per cent.

In RBS’s case, the group may have reinstated dividend payments earlier this year for the first time in a decade, but management’s caution towards the potential impact of Brexit on its profitability has been to the detriment of its share price. The shares hit a 12-month low on the day that chief executive Ross McEwan announced a £100m impairment charge, in an attempt to insulate itself against an expected rise in customers defaulting on their loan repayments due to a “more uncertain economic outlook”.

The banking group also decided to hold back more capital on its balance sheet rather than lend it out, resulting in an 1.9 percentage point decline in its net interest margin to 1.93 per cent at the end of September.

What has driven Lloyds’ share price down?
Lloyds’ poor share price performance belies a resilient showing so far this year. In contrast to most of its UK-listed peers, the lender’s net interest margin held steady at 2.93 per cent at the end of September. Management also reaffirmed previously boosted capital generation guidance for the full year, which bodes well for further dividend increases and potential share buybacks when the lender announces its 2018 full-year results next February.

However, its shares were dented further on Friday when the High Court ruled that the group must amend its pension rules to equalise pension payments for men and women. Lloyds has estimated that the bill for this will come in at between ÂŁ100m and ÂŁ150m.

What could reverse UK lenders’ poor share price performance?
Shares in HSBC rallied as much as 5 per cent on Monday morning after the lender reported a 16 per cent jump in underlying pre-tax profits to $6.2bn during the third quarter. That was thanks to new chief executive John Flint keeping tight control on costs and showed that investors are willing to reward lenders for delivering on their strategy. Easing of trade tensions between the US and China would likely help investor sentiment towards HSBC, even if Mr Flint said he had yet to see any impact on the lenders’ businesses or that of its clients.

Clarity on the terms of the UK’s exit from the EU may also provide some relief to domestically-focused lenders such as Lloyds and RBS. The continued normalisation of monetary policy should aid net interest margins, which have been squeezed by historically low interest rates, and could also ease some of the intense competition within the UK mortgage market.

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