UK Banks Defy Odds Post-Budget, But Can the Trend Continue?

The majority of British banks, except Lloyds, have overperformed last month, but can the trend persist in the coming weeks?

The Budget Winners

Major UK banks have emerged resilient during the recent earnings season, with Standard Chartered and NatWest leading the pack in stock price gains, up double digits over the past 30 days. They have managed to avoid the turbulence affecting UK companies that are concerned about the impact of the latest budget. In fact, banks gained at the end of last month after it became clear that they would not be targeted by new taxes in the Labour spending plan. With Chancellor Rachel Reeves assuring that she will not seek to raise taxes again, the banking sector appears to have avoided new levies for the time being. Investors can now focus on the bottom line and the impact of the future policy on net interest income.

Lloyds is an exception to the upward mobility of UK banking stocks, having fallen by a double-digit decline in the same period, attributed to its exposure to motor finance. In late October, a London court ruled that lenders must fully inform customers about commissions when providing loans for motor vehicles, prompting the Financial Conduct Authority (FCA) to consider a multi-billion-pound redress scheme. Details of the compensation scheme are scheduled for release in March, with Lloyds and Close Brothers seen as the most affected. Analysts speculate that the scheme could cost the sector up to £16 billion.​

Momentum Continuation

After third-quarter bank earnings in the UK beat estimates, analysts upgraded their ratings and price targets, even before the Budget announcement. Interest rate cuts are expected to boost borrowing and, consequently, the income of banks across the board. With greater clarity about the tax situation, investors are expected to return and invest in the sector. While increased spending might fuel inflation, analysts view it as supporting money growth, transfers and investment, which would generally provide a positive outlook for the banking sector, assuming the economy remains in expansion.

Interestingly, rating agencies have a positive outlook for Lloyds, with Fitch upgrading its outlook on Thursday following an upgrade from Deutsche Bank. Fitch also has a positive outlook for the banking sector, acknowledging that falling interest rates might pressure revenues but pointing out that domestically-focused UK banks have significant liquidity buffers and conservative risk profiles to stand out in potentially more adverse conditions. Easing inflationary conditions and growing mortgage portfolios as interest rates decrease are expected to drive profitability in UK banks through the new year and beyond.​

Lloyds’ Double Bottom

Lloyds failed to extend gains to the projected measured-move target of 65 pence, which was expected following a triangle pattern completed near 41 pence. However, prices trade a tad above a potential double bottom pattern at 52 pence, with regional support opening the door towards 65 and potentially the 70 pence resistance, a level measured by the length of the first upward leg ranging from 24 to 56 pence. If the local support fails to hold, it could signal further downside, with the stock potentially declining towards 48 pence, followed by the 40 handle.​

Source: SpreadEX / Lloyds Banking Group

Key Takeaways

Most major British banks have performed well over the past month as the budget did not impose new taxes on the banking sector. Analysts expect a favourable tax situation, coupled with expected interest rate cuts, to boost borrowing and subsequently increase net interest income for banks. However, Lloyds has been an exception, facing a double-digit decline due to its exposure to motor finance and the potential impact of a multi-billion-pound redress scheme. Yet, rating agencies hold a positive outlook for the bank and the broader UK banking sector, citing conservative risk profiles and the ability to withstand potential challenges.​