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British banks suffer amid sterling and gilt woes

3 Oct 2022 05:02 PM

Throughout 2022 UK banks, like NatWest, Lloyds, Barclays, and HSBC enjoyed rallies as the Bank of England was in the early stages of its interest rate hiking cycle. After much speculation and a false start, the BoE lifted rates in December 2019 – it was the first hike since the pandemic, it was also the first lift since 2018. The bank went on to lift rates in February, March, May, June, August, and September. In that time frame, rates were upped by 1.65% and the markets are pricing in further lifts. Banks tend to perform well during periods of rising interest rates as lending margins improve. In recent months all the banks revealed increases in net interest rate margins, but at the same time, many of the institutions declared they were setting aside funds for potential bad debts as it was feared the British economy might enter a recession.

Last week was a turbulent for UK PLC as sterling and government bonds took a knock as there are questions over the government’s ability to service its debt levels. Last month, the Truss administration announced it would shield individuals and businesses from surging energy bills by introducing an energy support cap scheme, and it is estimate that could cost £100-£150 billion. Recently, a mini budget was announced, and it included a raft of tax cuts that are aimed a boosting the economy. The cuts amount to tens of billions and so far, there are serious questions being asked as to whether the cuts will stimulate the economy. In addition to that, the tax cuts amount to £45 billion, and so far, it is understood that it will be funded through borrowing – once again ramping up government borrowing. This comes at a hike when the Bank of England is hiking rates and yields – the costs of borrowing is rising. Only a few days ago, sterling sold off so severely that it fell to a record low versus the US dollar. On top of that, there was such a drop in long-dated UK government bonds that the BoE had to buy up the debt securities as a way of supporting the price as there were rumblings that certain UK pension groups could go bankrupt. Some stability has returned to the British pound thanks to the BoE’s action, but sentiment is still fragile.

Investors started to turn their backs on British assets lately and the included banks. The share price of Barclays, Lloyds, NatWest, and HSBC all fell to multi-month lows last week. Which was a sharp turnaround in sentiment in terms of share price action, NatWest is performing the best, as it only fell to a two-month low and keep in in mind it hit a four year high in September. HSBC is the underperformer of the bunch as it stock printed a six month low.

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