UK macro data continues to surprise positively, but the same is no longer true of UK banks volumes. In a big picture for winter 2016/17 Citi’s analysts point that mortgage loan growth slowed “slightly” in 4Q16, while corporate loan balances contracted, “as a combination of higher stamp duty and Brexit -related fears” served to delay investment decisions and dampen loan demand. They also expect mortgage loan growth to decline to c1% in 2017 (from c4%), unsecured to decline to c4% (c8%) and corporate loan growth to fall to zero (c2%).
UK NIMs: Delaying The Inevitable
Banks have proactively cut savings rates and called expensive legacy debt. This should provide some protection to interest margins in the near -term. Citi explains:
We expect NIMs to be broadly flat in 4Q16 and up in 1Q17.However with ongoing asset margin pressure, and limited ability to re -price liabilities further, we then expect NIMs to fall sharply from 2Q17 onwards , to the extent that the NIM exit run -rate in 4Q17 is likely to be well below the 2017 average.
International UK Banks More Attractive
Over 2017 -19 the house’s experts expect core PBT to fall at Lloyds and RBS, and to be held flat at Barclays, given the aforementioned pressures, plus a slow uptick in loan losses from cyclical lows. In contrast , the UK Challenger banks offer earnings growth via market share gains, while the UK International banks offer gearing to better trade volumes (higher commodity prices), rising US rates, and cost saves. They also offer superior 2017 dividend yields.
Prefer UK International, Neutral UK Challenger, Underweight UK Domestics
Citi’s top-pick in the UK is Standard Chartered. As they report:
We also have a Buy rating on HSBC. In contrast , we have Sell ratings on Barclays, Lloyds and RBS. Among the UK Challenger banks , our preference is for Shawbrook. Our target price and estimate changes are listed below and 4Q16 results previews are located inside this report