Just three months after Bank of England governor Andrew Bailey called their weak share prices a “puzzle”, the UK’s biggest banks have buoyed investors with impressive returns.
The FTSE All-Share Banks index has jumped more than 13 per cent so far this year to reach its highest level since July 2018, driven by two names in particular – Natwest and Barclays.
The FTSE 100 lenders are up 38 per cent and 31 per cent respectively in 2024. Natwest is currently the top stock on the FTSE 100 for share performance in the year to date. According to Hargreaves Lansdown, it also leads the pack in total returns, which include dividends.
Banking stocks are considered cyclical as they tend to perform well when the economy is growing. GDP growth in January and February has raised hope that the UK may already be out of the recession it entered at the end of last year, while business activity growth accelerated to an 11-month high in April, according to a “flash” PMI survey.
Matt Britzman, equity analyst at Hargreaves Lansdown, told City A.M. that banking stocks are defying “low expectations”.
“They have long been unloved and exited 2023 with fears that growth would slow as the benefit from higher rates came to an end and economic conditions could cause loan defaults to spike,” he said.
“The reality is, borrowers have proven to be much more resilient than expected, the economic outlook for key markets like the UK and US has improved, and rates are expected to stay higher than many had thought. That feeds into a more encouraging outlook for banks.”
Despite their profits falling amid looming interest rate cuts and fierce competition for mortgages and deposits, all of the Big Four banks reported lower impairment charges in the first quarter of 2024. These charges reflect existing levels of distress and banks’ own forecasts for how the economy will develop.
Natwest’s stock is trading at its highest level since last January, after it recovered from a rocky second half of last year marked by a “debanking” row with former Ukip leader Nigel Farage, which triggered the resignation of chief executive Dame Alison Rose, and disappointing third-quarter results.
However, the bank’s last two quarterly results announcements have impressed investors. Natwest notched its highest annual profit since 2007 last year on the back of interest rate hikes, while a 27 per cent drop in its first-quarter earnings came in ahead of analysts’ estimates.
This year, it has also installed a permanent CEO to replace Rose and overhauled its executive team. Investors are now looking forward to a possible retail sale of part of the government’s remaining stake in the bank as early as this summer.
Barclays has posted the third-best best returns in the FTSE 100, behind Rolls-Royce. The bank’s shares have been trading at their highest level since February 2022 after revealing a first-quarter profit ahead of expectations last week. The beat offset a disappointing performance from its investment bank.
A four-and-a-half-hour investor presentation in February gave shareholders more clarity on the bank’s biggest restructuring since the financial crisis. It is designed to save £2bn in costs and return £10bn to shareholders by 2026.
“Barclays and Natwest have taken the run one step further, and that’s in part due to lower expectations surrounding them, compared to their peers, going into the year,” Britzman said.
He added that Natwest in particular “still looks like it’s set to be one of the biggest benefactors of the healthy banking environment in the UK”.
Lloyds and HSBC trail behind
The picture has been more mixed for Lloyds Banking Group, the UK’s largest domestic lender, and HSBC, Europe’s biggest bank.
Lloyds is considered the most exposed bank to a City watchdog review into now-banned motor finance practices, first announced in January. The group made a £450m provision in February to cover potential costs tied to the probe, which analysts have estimated could be some £2.5bn.
Nevertheless, the group’s shares have gained 10 per cent this year, lifted by a record annual profit and good news across the rest of the sector.
HSBC, which makes the bulk of its profits in Asia, suffered its biggest one-day share slump in almost four years in February after revealing a $3bn (£2.4bn) writedown on its holding in a Chinese bank and setting aside $200m to cover potential losses linked to the country’s commercial real estate sector.
The bank’s shares are still up 11 per cent in the year to date, with record profits for 2023 and an earnings beat in the first quarter of 2024 helped by the sale of its Canadian business.
“Even then, analysts seem to suspect that this may be as good as it gets for HSBC, as profits are not expected to progress in the next two years,” said Russ Mould, investment director at AJ Bell.