In these extraordinary market conditions, we look at how UK banks performed in May, and evaluate analysts’ long-term targets for Lloyds [LLOY], Barclays [BARC] and RBS’s [RBS] share prices, among others.
It's no secret that the coronavirus outbreak sent bank shares into free fall. Lloyds’ share price, for example, was trading at 55.35p on 21 February. It now trades around the 30p level. RBS and Barclays’ share prices have suffered similar fates, sinking 45.6% and 39.5% respectively.
First-quarter UK bank earnings results saw profits halved and huge amounts put aside to cover loans. Yet May has seen share price rallies (however brief) from both big banks - including Lloyds, Barclays and RBS - and smaller challengers. An easing of lockdown measures and rumours of a coronavirus vaccine have all helped these upward peaks.
UBS banking analyst Jason Napier sees strength in the long-term outlook for the nation’s banks, like Barclays, Lloyds and RBS, in respect to both business and share price performance. Unlike in the EU where interest rates are -0.5, UK rates are still positive, while regulatory changes in the wake of the 2008 financial crisis mean banks have much more capital to absorb losses.
Still, there's a long way to go. According to UBS, both Lloyds and Barclays are looking at a 15% quarter-on-quarter decline in net interest income. Low-interest rates and pressure on CET1 capital ratios are likely to continue to hurt bank earnings in 2020. Distinctly uninspiring forecast for those invested or trading the banks’ share prices.
Lloyds & Barclays' expected quarter-on-quarter decline in net interest income
And if analysts thought Q1's dismal earnings were bad, things could be about to get worse. Next quarter's earnings will cover three full months of the coronavirus's impact. So how did UK banks hold up over the past month? And how should investors and traders of Lloyds, Barclays, RBS and the UK’s challenger banks’ share prices, position themselves for the rest of 2020?
As a bellwether for the UK economy, the outbreak has hit Lloyds harder than most. Lloyds’ share price is down 5.4% over the month and has struggled to mount any kind of rally. In fact, it saw 5 straight days of losses twice in the period as traders dumped the stock following the bank’s Q1 earnings.
Lloyds' share price fall this month
Lloyds is the UK's biggest mortgage lender. Already it has set aside £1.4 billion in credit provisions to cover bad loans as people struggle to pay back debt. Next quarter this figure could rise sharply.
UBS has a 45p share price target on Lloyds. Hitting this would see a 60% upside.
Barclays’ share price is up over 16% this past month. Unlike Lloyds, the bank benefits from a more diversified business model. This includes an investment banking operation where revenue is largely unaffected by interest rate cuts. The bank has also benefited from relatively good Q1 earnings, with £900 million in statutory pre-tax profit.
Barclays' share price rise this month
Last month, RBC Capital reiterated its sector performer rating on Barclays, putting a 110p share price target on the stock. Hitting this would see a 6% upside.
Sending RBS's share price up at the start of May was news of its £14 billion capital cushion - the largest of any UK bank. However, the rally has now cooled and the share price is back where it started the month. As one of the first banks to start lending to struggling businesses, the bank saw a 7% quarter-on-quarter rise in its loan book.
UBS upgraded RBS to a Buy rating at the end of April, trimming its share price target on the bank to 145p. Hitting this would see a 39% upside.
As a savings-specialist, Paragon will have felt the squeeze over the BoE's decision to slash rates. In response, the bank reduced interest rates on its own saving products.
Paragon's share price has gained 3.82% over the past month. Further gains could come if interest rates rise again this year. In the unlikely scenario that negative interest rates come in, the stock could fall.
Paragon's share price rise this month
UBS has a 435p share price target on Paragon. Hitting this would see a 33% upside on the current share price.
Challenger bank Virgin Money's share price has gained 18.22% in the past month following Q1 results. Investors seemed to like a loan book dominated by high-quality mortgages. Also in the bank’s favour is a lack of exposure to coronavirus-impacted business sectors. Still, Virgin Money put aside £232 million to cover any bad loans.
UBS has a 170p share price target on the stock - a 117% upside.
Virgin Money's share price rise this month
OneSavingsBank's share price is up over 17% this month. Another challenger bank, it has a 16% CET1 ratio. However, as a mortgage specialist, the bank could be vulnerable to bad loans in the coming year. The bank has warned that credit loss provisions could hit £42.9 million by December.
RBC Capital Markets trimmed its forecast for the bank’s share price to 320p - a 26% upside on the current share price.
OneSavings Bank's share price rise this month