UK banks regain lost ground as investors eye a recovery

Kumutha Ramanathan
·Contributor
·2-min read
The offices of banking giants HSBC and Barclays are pictured at the the secondary central business district of Canary Wharf on the Isle of Dogs, east London on December 11, 2020. - A Brexit trade deal between Britain and the European Union looked to be hanging in the balance on Friday, after leaders on both sides of the Channel gave a gloomy assessment of progress in last-gasp talks. The Bank of England said Friday that UK banks remained "resilient" to the risks of Brexit and coronavirus, but warned financial services could face "disruption" when the transition period ends. (Photo by Tolga Akmen / AFP) (Photo by TOLGA AKMEN/AFP via Getty Images)
European markets faced heavy selling pressure on Monday following news of the fast-spreading COVID-19 mutation hitting banking, travel and leisure stocks, in particular. Photo: Tolga Akmen/AFP/Getty Images

UK banking shares surged in mid-day trading in London as investors hold out hope for a global economic recovery, following losses on Monday as the announcement of a new variant of the coronavirus originating in Britain shocked markets.

Barclays (BARC.L) was up 3.2%, Lloyds (LLOY.L) also gained 3.2% and Natwest (NWG.L) was led higher 2.8% at around 11.40am in London — making banks the top gainers on the FTSE (^FTSE).

UK banks rallied on Tuesday as markets still think a global economic recovery is on its way, despite news of a new COVID-19 variant originating in Britain.
Shares in Natwest ticked up in trade in London. Chart: Yahoo Finance

“Barclays, Natwest and Lloyds have a major exposure in terms of BBL [Bounce Back Loan Scheme] and other coronavirus related support program,” said Naeem Aslam, chief market analyst at AvaTrade.

“Given the fact that there aren’t much concerns about the mutation of coronavirus, traders believe that economic recovery will get back on track once we are done with the current lockdown.”

European markets faced heavy selling pressure on Monday following news of the fast-spreading COVID-19 mutation hitting banking, travel and leisure stocks, in particular.

Despite a weak start to trading on Tuesday morning for the FTSE (^FTSE), the index headed higher in mid-day trading, joining its European peers.

The new variant has forced the UK government to place further restrictions on movement in London and other parts of southeast England, in addition to backtracking on rules around the mixing of households over the Christmas break.

READ MORE: Travel stocks recover from hit after countries ban flights from UK

Despite Tuesday’s gains, UK banking stocks have taken a beating in 2020 as the Bank of England central bank moved to curtail investor dividends and share buybacks to ensure banks could support any foreclosures or bankruptcies spurred on by the COVID-19 economic fallout.

As signs of a global market recovery became more apparent and banks proved they were holding higher levels of cash reserves, the BOE and its central bank peers relaxed the rules, allowing lenders to restart dividends and bonuses.

Still, some headwinds remain, with Deutsche Bank saying in a recent note that despite UK banks sitting “on a decent capital position” that it expects to remain over the next 2-3 years, revenues will be down across the sector 7% on average, with Lloyds (LLOY.L), Natwest (NWG.L) and HSBC (HSBA.L) being the worst impacted.

Their profitability is under question due to the systematical loosening of monetary policy and an uncertain employment backdrop, said Deutsche, which could bring about a wave of non-performing loans and COVID-19 economic bounceback costs.

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