Investors Seek Out Banking Stocks Post Brexit Volatility

Financial stocks have regained much of their post-Brexit losses, and as the share prices climbed, so too has investors’ interest in the sector piqued. In fact, according to Morningstar.co.uk data, banking and financial services stocks were the most popular among readers in August.

Lloyds Bank was the most clicked on stock on Morningstar.co.uk last month, followed by Legal & General and HSBC. Also in the top 10 were Aviva, Barclays and Standard Life.

Financial Stocks Rebound Post Brexit Vote

Financial stocks tumbled on the result day of European Union referendum, however they have no recovered to levels similar to those at the beginning of the year.

Across the financial companies sector in the FTSE 100, Lloyds Banking Group (LLOY) and Barclays (BARC) have rallied since the Brexit result on June 24, gaining 1.89% and 10.3% respectively. However, shares of these two companies are still down 16.7% and 21.2% year to date.

Financial services companies also experience similar situations. Shares in Legal & General Group (LGEN), Aviva (AV.) and Standard Life (SL.) increased 13.7%, 17.9% and 27.3% respectively since the Brexit result on June 24, however their shares are down 17.3%, 11.1%, and 3.1% year to date.

The more internationally exposed bank, HSBC (HSBA), is the only banking stock which has seen its shares rally year to date at 9%. Despite the bank having less exposure to Brexit-risk due to its geographic diversification, it has its own challenges to face as well thanks to Asia’s economic slowdown. Asia dominates about two thirds of operating profits in HSBC.

“HSBC is refocusing its business on the region as China's growth slows, and earnings could be volatile. While we see HSBC as well capitalised, we think a dividend cut could be in the cards if conditions continue to deteriorate,” said Stephen Ellis, director of financial services equity research at Morningstar.

HSBC has indicated that perhaps 1,000 jobs could be relocated out of the UK to Paris, but plans to maintain its UK headquarters. This stock is currently rated by Morningstar analysts as a three-star stock, meaning the stock is trading at its fair estimate value.

Fund Managers Back Financial Stocks

Morningstar share-ownership data revealed that fund managers continue to back banks despite worries spurred on low interest rates and the impact of Brexit on banks.

Two of the largest asset managers in the world, JP Morgan (JPM) and BlackRock (BLK), hold 6.3% and 5.5% of HSBC (HSBA) while BlackRock also holds 5% each of Lloyds Banking Group (LLOY) and Barclays (BARC), Aviva (AV.) and Standard Life (SL.).

Outlook for UK Banks Going Forward

Brexit uncertainties, together with lower-for-longer interest rates, have unsurprisingly driven sentiment and valuations around banking stocks to multi-year lows, Ritu Vohora, investment director at M&G said.

However, Morningstar’s Ellis commented that the recent rebound in UK banks is more of a “dead cat bounce” than anything else and the short-term outlook of the sector hasn’t changed materially to permit a rebound of this nature.

“It would be reasonable to expect the banks to struggle going forward with higher loan losses, slow loan growth and higher costs,” Ellis said.

“Instead of things falling off a cliff like we saw in 2008 to 2009, it looks like Brexit will be more of a slower reduction in growth and continued uncertainty versus a sharp drop-off in economic output and bank profitability. May indicating that she won’t trigger Article 50 in 2016 for example kicks the can further down the road, but doesn’t quite resolve the underlying issues,” he added.

Lloyds currently has a four-star rating, meaning analysts believe the stock is trading below its shares values. Ellis believed Lloyds is on track to report a healthy profit in 2016, now that misconduct charges are largely past. Aviva also carries a four-star rating while Barclays is a three-star stock, meaning analysts consider it to be fair value.