The bank quake also offers opportunities

The bank quake also offers opportunities

Dhe bank tremors of the past three weeks have also caused nervousness in the financial center of London and weighed on the stock market. The leading British index FTSE100, which briefly climbed to an all-time high of over 8000 points in February, fell back to 7335 points in March. Since then, however, the situation has calmed down. On Tuesday, the index rose 0.5 percent and climbed back above 7500 points. It is only slightly below the level at the beginning of the year.

Alongside commodities and oil companies, banks are an important market segment on the London Stock Exchange and employ hundreds of thousands in the City. The banking index in the broader FTSE350 equity index is down around 11 percent since March 8. The background was the banking tremor that emanated from the USA, beginning with the Silicon Valley Bank, whose British subsidiary took over HSBC for a symbolic price of one pound. Then the major Swiss bank Credit Suisse had to be rescued by UBS in a forced marriage. At the end of last week, the price of Deutsche Bank suddenly went down. All of this hurt UK financials.

The Barclays course in particular is weak. The stock market value of the big bank, which is very active in investment banking, is currently around 15 percent below the value at the beginning of the year; CS Venkatakrishnan-led bank’s stock has lost almost as much as Deutsche Bank’s stock (down 17 percent). Since an interim high in February, Barclays has even fallen by a quarter. Other major British banks fared much better. The papers of HSBC are even slightly above the level at the beginning of the year (plus 3 percent). And Lloyds Banking Group, NatWest and Standard Chartered are only between minus 1 percent and minus 6 percent year-to-date.

On Monday and Tuesday, the shares of most banks rose by one to two percent. “The contagion from US banks has been very limited so far, so hopes are growing that the Silicon Valley bank debacle will have little impact on global growth,” said Hargreaves Lansdown’s Susannah Streeter. Some analysts see the recent price declines as an opportunity to get into financials.

Goldman Sachs (GS) judges that British financial institutions have solid capital and liquidity resources and good prospects for returns. “Our equity analysts think the fundamentals for UK banks remain strong,” writes the American investment bank. While risks have increased, one sees upside opportunities, especially after the recent sell-off in financials. The price-earnings ratio of British banks is as low as it was during the financial crisis, the discount is even greater than during the sovereign debt crisis, Brexit and the Corona crisis. All of this makes bank stocks look cheap.

Goldman Sachs estimates that UK banks will return nearly 11 percent on average, with 6 percent coming from dividend payments and 5 percent from big share buyback programs. The GS analysts have expected returns that are almost twice as high for the NatWest Group, average for Barclays and rather below average for HSBC, Standard Chartered and the Lloyds Banking Group. From Goldman Sachs’ point of view, banks should be overweight in a British stock portfolio. The analysis house Morningstar also finds that the large British financial stocks are rather cheap.

A slightly better economic outlook should also help British equities. According to the latest forecast from the Office of Budgetary Discipline, the kingdom’s economy is likely to avoid a technical recession. Economic output grew faster than expected in January. But it was unfavorable that the inflation rate did not fall, but increased slightly to 10.4 percent in February, contrary to expectations. That drove the Bank of England to raise interest rates by a quarter point last week. The higher interest rates are a double-edged sword for the banks. Some come through the turnaround in interest rates better than others.

According to Goldman Sachs, however, the British stock market remains interesting despite everything. “In our view, the UK continues to offer good value compared to other equity indices around the world,” writes the American investment bank. Year-to-date, the FTSE100 had significantly underperformed other indices. Both the Spanish Ibex, the Italian MIB, the French CAC40 and the Dax had developed significantly better; they are between 8 and 10 percent above the level at the beginning of the year. The Goldman Sachs stock analysts see little upside potential for the European Euro Stoxx 50 over a twelve-month period. For the FTSE100, however, they suggest that it could climb from the current 7500 to 8200 points.


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