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, 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.
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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