Despite last week’s announcement of stimulus measures for UK banks, Nomura has maintained its ‘neutral’ rating on the sector, saying that the outlook for lenders is still difficult.
During the Mansion House speech on Thursday night, authorities announced two key measures to reduce the cost of funding for UK banks. A new ‘Funding for Lending’ scheme has been set up to encourage banks to lend against cheaper-than-market funding. A second scheme, called Extended Collateral Term Repo Facility, will give banks access to short-term money to manage ‘exceptional market stresses’.
‘The schemes appear to be designed to provide liquidity to banks so that they are not forced to de-leverage for liquidity needs, thereby creating a debt deflationary spiral,’ explains Nomura in a research note on Monday morning. However, the broker says that while these measures are positive for lenders reliant on wholesale funding, ‘they only mitigate the pressures banks are facing in a tough environment.’
‘UK banks rallied with the monetary measures announced along with the ICB proposals. While the initial positive reaction is justified and may even extend this week, we see it more as a trading/short term rally, and a continuation of the volatile price reaction we have seen over the past year.’
Nomura questions whether these measures were a precautionary act ahead of the Greek elections to contain any fallout, or whether they were introduced because the outlook for UK banks has worsened.
‘While in the near term banks will be driven by risk appetite, sovereign risks and de-leveraging, we continue to see an extended period of weak fundamentals for UK and European banks, including sub-trend profitability and de-leveraging, which is negative for earnings and book value.’
Nomura remains defensively positioned within the UK banking sector, preferring Standard Chartered and HSBC (both given ‘buy’ ratings) for their exposure to the emerging markets. Barclays is given a ‘neutral’ rating, while Lloyds and Royal Bank of Scotland are both labelled ‘reduce’.
Banking stocks were down 0.58% on average in morning trade on Monday.