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UK bank shares hit by concerns over the economy

The key takeout from the UK banks’ first quarter earnings season is that the market is more focused on a deteriorating credit cycle than the fact reported earnings exceeded forecasts.
This was reflected in languishing share prices for companies apart from emerging markets-focused Standard Chartered (STAN) where its stock price jumped 14% following its earnings release.
There are several reasons for the general muted response to a seemingly robust series of earnings numbers.
The market appears to be concerned with the cautionary comments made by various management teams relating to what might happen to the UK economy given the cost-of-living crisis.
For example, Lloyds’ (LLOY) chief executive Charlie Nunn said: ‘The outlook for the UK economy remains uncertain, particularly
with regards to the persistency and impact of higher inflation.’
In a similar vein, NatWest (NWG) chief executive Alison Rose commented: ‘We are also very aware of the challenges and concerns the cost-of-living crisis is causing for many of our customers up and down the country.’
Another disconcerting and ubiquitous feature of the UK banks’ first quarter earnings was the disappointing nature of core capital ratios which are a key measure of financial strength.
HSBC (HSBA) reported a tier 1 equity ratio down 1.7 percentage points at 14.1%, versus a consensus of 15%. As a result, no further share buybacks are expected from the group this year. Barclays (BARC) suspended its share buyback plan until talks with US regulators over a trading error have been resolved.
NatWest reported a tier 1 capital ratio of 15.2% that was below a consensus forecast of 15.6%.
This comes a time when banks feel it necessary to put aside millions of pounds in anticipation of a rise in defaults.
It is becoming increasingly apparent that impairments for bad loans will increase this year as consumers’ finances come under pressure in the wake of higher inflation.
Lloyds has added a further £100 million for higher cost-of-living risks. This may prove to be insufficient if the economic situation deteriorates.
The first quarter earnings season has highlighted another quandary facing UK banks. A rising interest rate environment has traditionally been viewed as being positive for the sector. However, the UK consumer is in a more fragile financial predicament and is particularly sensitive to the costs associated with a rise in interest rates.
Investors and banks are acutely aware that borrowers unable to service their loan and mortgage costs will default.
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