Since Russia began the invasion of Ukraine, share prices of the mainstream UK banks have fallen on average by 14%.
Barclays (BARC), has been particularly negatively impacted recoding a 17% share price decline. Conversely, HSBC (HSBA) has been the least hit within the sector, experiencing a more modest 11% decline in it share price since the initiation of the conflict.
These share price declines appear overdone given that none of the UK banks have any meaningful exposure to either Russia or Ukraine.
Moreover, the balance sheets for the UK banks are well capitalized, well funded and liquid. From a valuation perspective the sector is appealing, trading on a price-to-tangible net asset value of 0.6 times.
RATE RISE BENEFITS
The UK banks sector is well positioned to benefit from an increase in UK interest rates. The conflict in Ukraine has resulted in a significant increase in the price of fuel, food and freight.
This is exacerbating the already rampant inflationary pressures within the UK economy.
The Bank of England will face renewed pressure to further increase interest rates at its next monetary policy meeting on 17 March.
Banks would be a key beneficiary of a rise in UK interest rates, as it enables them to increase their net interest margins (the difference between the rate at which banks can borrow and lend to customers).
All the large UK banks increased their full year dividend as well as share buybacks during the current financial year. This reflects the strength of the balance sheets and underlying capital generation. Looking forward share buybacks are likely to continue.
AGGRESSIVE MORTGAGE MARKET COMPETITION
The outlook for the banks sector is not all rosy. One area of concern is the emergence of aggressive competition within the mortgage market.
Mortgage margins have been forced back to pre-pandemic levels in response to price cutting.
Consequently current new business pricing on mortgages is below the maturing back book (previously acquired customers).
This is particularly disconcerting for Lloyds (LLOY) which has a large exposure to the UK mortgage market.
