Despite the UK’s Brexit plans feeling less certain than ever, the UK’s top banks in the FTSE 100 have had relatively strong share price performances since the start of the year, even considering the mixed back of first quarter results they have reported in recent weeks.
Indeed, all three banking groups are facing headwinds. Lloyds has been unable to meet market expectations in its most recent quarterly results, RBS is preoccupied with a search for a new CEO, and Barclays is having trouble reenergising its corporate investment arm.
Lloyds' share price increase year-to-date
In the background, the unshakable shadow of Brexit continues to hang over each of them. While the Bank of England’s stress test in November found that the financial system would be able to withstand a disorderly exit from the EU, a recent survey by CBI and PwC found that conditions for British lenders worsened in the three months to May.
The survey found that optimism within the financial service sector has declined at the fastest rate since the 2008 financial crash. It also highlighted that banks are less confident in their ability to predict how Brexit might impact their customer’s behaviour.
Despite the pessimistic mood, businesses are reporting that they’re resilient and prepared for Brexit disruption, with the established players looking to make more collaborative efforts to ward off threats from challenger banks and bank-like fintechs.
So as the Brexit deadline of 31 October approaches, where will the banks' share prices end up? Here’s how the domestic lenders compare.
Lloyds, Barclays and RBS share price performance
Both Lloyds and Barclays share prices peaked within days of one another this year, rising 30.5% to 66.57p on 17 April and 12.5% to 169.40p on 18 April respectively. RBS meanwhile peaked earlier, rising 24% to 270.40p on the 19 March.Lloyds 1-year share price performance, CMC Markets, 11 June 2019
But since then, shares in these FTSE 100 banking giants have been on a downward trend. RBS takes the lead among them, falling nearly 21% since reaching this year’s high, with Lloyds and Barclays declining around 14% and 11% from their respective peaks.
UK banking incumbents dragged down by Brexit
Despite the lagging share prices, Morgan Stanley maintains an ‘overweight’ rating on Lloyds’ shares for its “compelling” valuation. The firm said the UK bank was the most profitable in the UK and Europe. However, it’s worth noting that Lloyds’ net profit margin (TTM) of 15.24 is below the sector’s average of 32.44, as competition in the mortgage market continues to constrain its margins for consumer lending.
With Brexit uncertainty dampening lenders’ businesses, US rival Nationwide Building Society [NBS] has managed to overtake the banking group’s 13.1% market share, according to BofA Merrill Lynch, who pointed out that its competitor’s 14.5% stake was now “well ahead”.
In addition, a 2% drop in the British lender’s forecast for earnings in 2020 and 2021 led Morgan Stanley to lower its price target on Lloyds’ shares from 78p to 70p on 5 June.
The price cutting has not only been limited to Lloyds. While Morgan Stanley maintained an ‘equal-weight’ rating on both RBS and Barclays, it lowered both of their target prices to 270p from 300p and to 180p from 200p respectively.
The investment bank expects that a delay to interest rate hikes until the second half of 2020, due to Brexit, will hit RBS’ earnings. It also highlighted a lack of progress in Barclays’ under pressure investment bank as a reason for caution.
|PE ratio (TTM)||68.75|
|Quarterly revenue growth (YoY)||-5.20%|
Barclays share price vitals, Yahoo finance, 11 June 2019
As for other analysts’ opinions, UBS’ head of European banks research Jason Napier continues to rate the three banks as a ‘buy’. However, he thinks the market will experience a downturn in the next few months, which could see the UK banks miss their respective return on tangible equity (ROTE) targets for 2019 and 2020.
“On our numbers, which assume that the banks fall short of their ROTE objectives, principally due to lower-than-planned revenues, Lloyds and Barclays are the sixth and seventh cheapest stocks in our coverage,” Napier, who has price targets of 290p, 75p and 220p respectively for RBS, Lloyds and Barclays, told City A.M.
Lloyds anticipates a ROTE of between 14% and 15% in 2019, compared to 12.5% in the most recent quarter. On the other hand, RBS has forecast a ROTE of more than 12% in 2020, while Barclays has pegged its 2019 target at 9% and greater than 10% in 2020.
Out of the three, Lloyds is by far the largest with £797.6bn in assets as of 2018, putting it in a good position to weather any economic storms, and while the UK banking industry has been underperforming – the FTSE 350 Banks index rose just 2% in the first five months of the year – Lloyds has performed better, having risen over 10% in the same period.
That’s not to say that RBS and Barclays don’t carry a large dominance in the market, with RBS’ assets reaching £694bn in 2018 and Barclays close behind at £659bn.
|PE ratio (TTM)||17.27|
|Operating margin (TTM)||20.80%|
RBS share price vitals, Yahoo finance, 11 June 2019
However, when it comes to each bank’s financial strength, Lloyd’s debt to equity is higher than that of its peers at 221.46, with Barclays coming in at 217.83 and RBS’ at 182.42. Overall, the trio are well above the sector’s average of 73.42, according to Reuters.
Lloyds, RBS and Barclays have proven resilient in the face of sector pressures, as they manage slowing business demand caused by Brexit uncertainty. However, what will separate the trio is which is better positioned to come out on top in the event of a UK market downturn.
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