Brexit deal could see bank shares rally

Edinburgh-based Royal Bank and Lloyds, owner of Bank of Scotland, saw stocks flag despite reporting healthy profits. Royal has also paid its first dividend since before the financial crisis, when it was bailed out by taxpayers at a cost of £45.5 billion.

The bank underlined the Brexit effect as it unveiled its third quarter results in October. It made a £100 million provision against bad debts escalating in the event of a disorderly Brexit, which came shortly after chief executive Ross McEwan had warned a no-deal Brexit could tip the UK economy into recession,

More recently, Royal Bank began the process to allow it to move up to £13 billion of assets managed by its investment banking operation to a subsidiary in the Netherlands should the UK leave the EU without a deal. And last month it unveiled a move to upgrade its branch in Frankfurt into a hub which would ultimately ensure it continues to benefit from passporting rights after Brexit, meaning that it could still offer financial services across the EU.

But it was not just the big four banks which saw their share price come under pressure in 2018. Shares in “challenger” CYBG, owner of Clydesdale Bank, were also down heavily over the year, having tumbled by around 50% since August.

Michael Hewson, chief market analyst at CMC Markets, said Royal Bank had all but “given up” the 20 per cent gain its shares made in 2017, when it was the best bank performer on the market.

And he said the main reason is the uncertain political climate, observing that a hard Brexit could lead to a spike in bad loans, falling house prices and more muted consumer spending.

“You would be forgiven for thinking the banks had a bad year for profitability, but they haven’t,” Mr Hewson said. “The big question is, why are they down? And they are down because there are concerns about what the future holds, whether it be a bad Brexit, a Corbyn Government or a further cut in interest rates.”

Mr Hewson added: “You’ve got two pictures. You’ve got a picture whereby Lloyds, RBS and Barclays have actually done well, in terms of the business. But in terms of the share price performance they have been rubbish.”

Summing up the situation, Laith Khalaf, senior analyst at Hargreaves Lansdown, said the share price of Lloyds is currently below its level in 2011, when the current chief executive Antonio Horta-Osorio took over. He said: “At that time it was making a loss. Last year it made a profit of £4 billion, but the price is still lower today. That tells you it is really being held back.

“If there was an orderly Brexit outcome, I think that tells you there is some upside in the banking sector.”

Mr Khalaf also flagged the danger to banks such as Royal and Lloyds if economic growth slows in light of a no-deal Brexit, particularly if it leads to increased losses on bad loans and more uncertainty for interest rates.

But he added: “Equally, if we do get some resolution that looks like we are heading for an orderly Brexit that is not going to harm the economy, there could be considerable upside for the banking sector.”

Highlighting the progress that both Lloyds and RBS are making some 10 years on from the financial crisis, Mr Khalaf added: “If Brexit wasn’t happening, we’d be having a very different conversation about banks.”

Building on the theme, Mr Hewson contends the major banks could well “rally very strongly” if there is progress on Brexit. He said: “If we do get a deal, I can foresee a scenario where they rally very strongly, Lloyds especially.

“In terms of where it [Lloyds] is valued, it is cheap as chips. That doesn’t mean it can’t get cheaper, and obviously it will depend an awful lot on the outcome of this Brexit farrago.”

However, with Theresa May showing no signs of building enough support for her Withdrawal Agreement as the Brexit date of March 29 approaches, he said a hard Brexit is looking “more likely”.