Not all doom and gloom for UK banks

WE ARE now more than four years on from the collapse of Lehman Brothers, and it is longer still since the taxpayer bailed out Northern Rock. In that time, there has been little good news for financials and for the UK banking sector specifically. Reinforced by Moody’s decision to maintain its negative outlook on the UK banking sector, you might be forgiven for shifting attention to other sectors of the UK equity markets. But there could be rays of hope at the end of the tunnel.

If you believe the doctrine of the central banks, the banking sector is in a much more steady position than it was. The European Central Bank (ECB) announced last month that it would engage in aggressive action via outright market transactions (OMT), in another attempt to ease the European liquidity crisis. Along with the Federal Reserve’s open-ended quantitative easing programme (QE3), the UK Funding for Lending scheme, and the likely increase of the Bank of England’s asset purchase programme in the not-too-distant future – from the current £375bn level – UK banks could be left in much stronger capital and liquidity positions. Coupled with this, UK banks have engaged in effective deleveraging, bringing their fully-loaded Basel III equity ratios from 4.3 per cent to 8.6 per cent.

As Liberium Capital also points out in a recent note, since the first indications of OMTs, historical and implied volatility has decreased for both UK banks and the broader FTSE. Citing Barclays as an example, over the past 12 months, implied volatility has dropped from 88 per cent to 34 per cent. By way of comparison, it has averaged 44 per cent since the start of the crisis in August 2007.

But is this enough to make the likes of Barclays, Lloyds or RBS a buy? Christopher Beauchamp, market analyst at IG isn’t convinced: “I think that, yes, the central bank activity will have a beneficial effect. But we are dealing with a banking sector that, even after more than four years, is still struggling.” Beauchamp adds: “There is still a lot of work to be done on rebuilding balance sheets and, in the case of RBS and Lloyds, they have yet to free themselves from government oversight.”

As has become the post-crisis cliché, the banks will be accused of papering over the cracks. But, even if you are to look at capital standings versus their European counterparts, UK financials look attractive. And, when the market decides that the sector has finally bottomed out, there could be big buys to be had.