UK Bank Stocks Surge Double Digits

The UK's benchmark index continues to hit new records as investors regain confidence in British financial institutions.

Leading or Following the Rally

As recently as last Tuesday, the FTSE 100 notched another all-time high, as the UK index has trended higher throughout the year. Despite weak economic performance, this has emerged, as the country encountered a technical recession last year, and high inflation has kept policy the most restrictive in decades. However, investors are growing more assured of an economic rebound, specifically within the banking sector. British banks have advanced 13% in 2024, moving past expectations of lacklustre performance, perplexing observers, including the BOE Governor, who said earlier this year that weakness among UK bank stocks was "puzzling."

While not all banks are equal, the sector gains primarily stem from NatWest and Barclays. In fact, NatWest is the top-performing stock on the index to date. This is despite the British government's plans to start divesting some of its stake in the bank later this year.

Looking Ahead

The factors that previously led to underperformance in UK banks may now be driving growth. Concerns over an economic downturn in the UK last year prompted banks to build substantial provisions. Now that the UK appears set for growth after a soft landing, these reserves provide banks with a strong cushion. They will be able to reward investors generously in the future as interest rates normalise and the economy expands faster than others.

All major banks are forecast to raise dividends in coming years as interest rates are expected to remain elevated, if not as high as currently. Over the past two years, cost control has increased banks' ability to pay dividends and conduct share buybacks this year and next. However, Barclays and NatWest were particularly conservative in 2022 and 2023. This may explain why investors are attracted to their shares in anticipation of management making up for it going forward.

Measuring the Triangle Breakout

The FTSE 100 index has the potential for further gains as it aims to reach the measured-move objective of 8430, implied by its recent triangle breakout near 7650. A brief pullback cannot be ruled out because 8500 also represents a strong psychological level. Support at 8050 will be key in determining the index's medium to long-term outlook, with a sustained move above 8430 potentially testing 8750 and 9K over the coming weeks. Conversely, a break lower may trigger a retreat to 7680 or lower at 7460.

Source: SpreadEx UK100

Key Takeaways

The UK stock market has continued reaching new highs as investor confidence grows. Despite economic headwinds, the banking sector, in particular, has seen renewed optimism, with UK bank stocks advancing 13% in 2024, driven primarily by NatWest and Barclays, even as the British government plans to begin divesting its stake in the former later this year. Looking ahead, cost controls over the past two years and substantial provisions set aside during economic uncertainty now position UK banks well to reward shareholders through higher dividends and buybacks as interest rates normalise and economic growth outpaces peers.