Low interest rates are to stay for longer as Citigroup also warns against the BoE cuts
Long-term outlook for the banking industry in the UK does not seem lucrative as Deutsche Bank AG (USA) (NYSE:DB) downgrades Royal Bank of Scotland (NYSE:RBS) and Lloyds Banking Group PLC (ADR) (NYSE:LYG) given the long period of lower interest rates, according to the Financial Times.
Both bank stocks plunged on the downgrades as the Deutsche Bank analyst, David Lock, expects the year-over-year earnings to decline even further. RBS dropped 4.1% while Lloyds slipped 2.2% on Monday. Moreover, FTSE 100 plummeted almost 0.2% after a huge rally from the beginning of September.
With lower interest rates for prolong period of time, the UK banks are on a survival mode looking to restructure their business models by selling the unwanted assets and improving their return on equity. Even after the Brexit shock, the UK bank stocks rebounded impressively after a two-day market plunge. RBS stock lost more than 20% of its value, while Lloyds stock slipped almost 17%. The investors and analysts still question for how long the rebound will last.
Mr. Lock outlined a few threats to the UK banks in his research note, which included “lower growth, higher cost of risk, regulatory change, [as well as] greater litigation, conduct and restructuring charges than forecast.”
According to Mr. Lock, RBS is the most vulnerable bank in the UK as he recommends Sell on the stock by expecting a downside of 15% at 170p. The bank is going through pretty challenging economic environment as they have already implemented deep cost cutting and have less room to further cut down cost.
Earlier this month, Citigroup stated that the expansionary monetary policy by Bank of England would have detrimental affects on the UK banks’ earnings. European banks look to survive in similar monetary policies by the European Central Bank, as growth remains the issue in Europe.
European and UK bank stocks are under immense pressure as the conditions are challenging with gilt yield and interest rates at their record lows. However, it is a testing time for banks to survive under such conditions. The conditions are expected to remain challenging for longer till a cyclical change drives the markets towards a more positive note.