Thursday's general election could gift UK banks an early Christmas present. Brexit and economic uncertainty have all hit Lloyds, RBS and Barclays share prices. But with the Tories ahead in the polls, this could be a business-friendly election.
A win for the Tories could bring about more certainty over Brexit. But with the economic outlook so mixed, will it be a mere short-term boost?
Lloyds share price
The Lloyds [LLOY] share price is a bellwether for the UK economy. Any continued Brexit uncertainty beyond the election will have a negative impact. That said, its shares are outperforming peers. Lloyds’ share price is up over 5% since this time last month. RBS and Barclays’ share prices are up 4% and down 1.2% respectively.
In a note titled “The 12 days of banks-mess”, Berenberg backed Lloyds to outpace other banks. The reason for optimism is Lloyds’ large exposure to the UK economy. If a Tory win delivers more confidence over Brexit, then the share price could enjoy a short-term bump.
Yet it’s a mixed outlook for Lloyds over the next 12 months. Goldman Sachs [GS] have reiterated their sell rating on the stock, considering it ‘overrated’. Goldman Sachs has a 51p price target on the stock, a 17% drop on the current share price. Societe Generale is more optimistic, with a 76p price target - a 24% gain if hit.
RBS share price
Despite a marginal 5.9% gain this year, analysts are optimistic about RBS [RBS]. Price targets from HSBC [HSBA], Deutsche Bank [DB] and Goldman Sachs suggest an upside anywhere between 3.4% and 28%. RBS's share price has mounted a formidable recovery from its 15 August low. Since then the stock has gained 29.1%.
But is RBS the long-term bet to Lloyds’ post-election short-term bounce? The analysts at Berenberg seem to think so. They suggest RBS can benefit in the long-term thanks to its interest rate gearing. This should help the bank’s lending business as it continues to get losses from credit under control.
Analysts have pinned a 301.06p average price target on RBS. Hitting this would represent a 31.3% upside on the current share price.
Barclays share price
Again it’s positive news for Barclays [BARC]. Analysts predict between 10% to 25% short-term upside thanks to investment banking momentum. But long-term headwinds in 2020 are set to persist. Barclays’ investment business accounts for 8% of revenue, raking in £5.5 billion in Q3.
Berenberg notes that investment banks still face low-interest rates and structural challenges. Thus, resulting cost inflation and investment in compliance and risk controls may hit hard. This could leave Barclays’ investment banking business vulnerable.
Moody's downgrades entire UK banking sector
Not everyone is convinced about the UK banking sector’s prospects. Moody's has downgraded its outlook on the whole sector from stable to negative.
Moody's believe that the UK economy is weakening. Ongoing uncertainty over Brexit has "reduced the country's growth prospects". This leaves the UK more susceptible to economic shocks. According to the analysis, GDP will slow to 1.2% and hit 1% by 2020.
Predicted GDP growth by 2020
Adding to woes are low-interest rates and mortgage market competition. These will continue to eat at net interest rates for UK banks. Moody's also highlights a potential rise in problem loans.
Are Moody's right? It seems that the UK banking sector could enjoy a short-term post-election boost. But the longer-term outlook is mixed.