Banks European Banks - UK Focus: 2Q shaping up to be a tough quarter

After a surge in activity in UK banks at the start of 2020, new buyer enquiries & instructions dropped in March. Lack of activity in 2Q should depress fee income near term: we expect a return to ~3% pa residential loan growth.

18 May 2020

This line chart illustrates the change in new buyer enquiries and in new instructions for the period from June 2017 to March 2020.

1Q20's results were reasonable, but belong to a different era...

First quarter results from the UK banks were better than feared and above (lowered) consensus expectations at a pre-provision profit (PPP) level. 

.... 2Q20 is going to show much tougher going in the revenue lines...

Unfortunately, there's worse to come, we think. The UK's relatively high interest rates have fallen more as has the yield curve. We expect activity-driven fee income to be weak with much of the UK subject to movement restrictions for most of 2Q.

.. against a sector that looks like it offers good long-term upside

UK domestic banks have performed relatively poorly YTD, unhelped perhaps by lack of a short ban, the FTSE100's composition, dividend cancellations and a larger decline in rates. While estimates are obviously sensitive to the duration of lockdown we think UK domestics offer longer term value. Much depends on how far capital ratios fall in this crisis and how much customer patterns have changed for good. We won't know what post-crisis consumption looks like until consumers and businesses open up. We expect the cost of equity (CoE) to remain high until post lockdown data is available.

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