3rd Oct 2022 06:59
(Alliance News) - Share price slides for UK banking stocks last week were hefty, but also "overdone", according to German bank Berenberg on Monday.
"Seven days can feel like a lifetime. Between Friday 23 and Thursday 29 September UK banks' share prices fell by 16%, with no respite," Berenberg said.
During that period, HSBC Holdings PLC lost some 8%, NatWest Group PLC fell around 9%, Lloyds Banking Group PLC fell about 12% and Barclays PLC shed 13%. Virgin Money UK PLC also lost around 13%. OSB Group PLC gave back 16%.
All six ended higher this past Friday, however, though not by enough to reverse the damage of a rough week.
Though chunkier than they needed to be, Berenberg believes the reasons for the share price falls "are not trivial".
On Friday, September 23, UK banking shares fell around 3%, in the wake of the government's mini-budget, which spooked markets.
"Speculation ahead of the government's plan that rates paid on reserves held at the Bank of England may become tiered did not come to pass. This is positive, in our view, although it was countered by the decision to cancel a planned reduction in the UK banking surcharge (the loss of a GBP1 billion earnings tailwind). More broadly, while pro-growth policies may ordinarily help banks, any perceived benefits were dominated by concerns about UK fiscal sustainability and risks from higher inflation," Berenberg said.
Another 3% fall came on Monday, as markets began to price in an emergency interest rate hike by the BoE, amid post-mini-budget turmoil.
On Tuesday, Berenberg noted shares fell around 2% as disruption intensified in the mortgage market.
"UK banks began to withdraw some new mortgage products, mainly for operational reasons. Specifically, since banks typically fix new lending rates over short periods of time, large intra-day hikes in risk-free rates would have reduced new mortgage margins materially (subject to hedging arrangements). New mortgage applications also spiked, as customers sought to lock in borrowing rates before banks raised pricing or withdrew products. This disruption has generally been very short-term (and has not affected customers that have already applied for a mortgage)," Berenberg explained.
Mortgage disruption also hit housebuilders. Barratt Developments PLC and Taylor Wimpey PLC each lost around 15% last week.
There was another large share price fall for UK banks on Wednesday, of around 4%. It was the day the BoE moved to calm bond market volatility.
The UK central bank on Wednesday said it will buy up long-dated government bonds to "restore orderly market conditions". It led to suggestions of a return to quantitative easing.
"The BoE's focus on gilts with durations greater than 20 years and plan to reverse this operation once conditions permit, means these comparisons with quantitative easing, while understandable, are somewhat unjustified. Consistent with this, the BoE's plan to reduce gilt holdings by GBP80 billion annually has not changed," Berenberg said.
Finally, there was another 4% drop on Thursday, though share price slides that day were indiscriminate. It was a poor day for risk appetite.
All in all, as far as the share moves for UK banks go, Berenberg said price action was over-exaggerated.
"We conclude that the benefits of higher interest rates broadly offset potential headwinds from slower growth and higher loan losses. With UK banks' implied cost of equity now at around 19%, above that of Italian banks, any easing of sentiment could create an opportunity. As the past seven days have shown, however, the timing of any relief may remain dependent on politics, not fundamentals," Berenberg said.
By Eric Cunha; [email protected]
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