Interactive Investor

UK banks among stocks in trouble after latest inflation shock

21st June 2023 13:11

by Graeme Evans from interactive investor

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Rising mortgage costs are making life hard for millions of borrowers, with a knock-on effect hurting other sectors. Our City writer names the shares in bother today.

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Worries over how Lloyds Banking Group (LSE:LLOY) and NatWest (LSE:NWG) will withstand a recession caused by rising interest rates heaped more pressure on their share prices today.

In a session when inflation’s stubbornly high reading of 8.7% damaged a wide range of UK-focused stocks, Lloyds fell 0.8p to just above 44p and NatWest lost 6.9p to 238.4p. Their performances were in contrast to Asia-focused lender HSBC (LSE:HSBA), which rose 2.2p to 617.4p.

The falls mean NatWest and Lloyds shares are back trading where they were in the aftermath of the mini-budget crisis in November, when interest rates were 3% compared with the 5% that many forecasters expect the Bank of England to hike to tomorrow.

Any hope of a re-rating for bank shares on the back of such margin-enhancing rises in borrowing costs has been washed away by fears of slowing top-line momentum and higher bad debt impairments as Britain’s mortgage rate crisis deepens.

Average fixed home loan rates are now above 6%, and with households set for a payment shock as their Covid-era deals come to an end, lenders are facing heightened political and media scrutiny on the spread between their savings and mortgage rates.

That will certainly be the case when Lloyds presents half-year results on 26 July, followed by NatWest on 28 July. However, the figures will also be an opportunity for the lenders to remind investors of their defensive qualities as stronger balance sheets and more robust lending criteria provide greater insulation against future economic shocks.

The banks also delivered better pre-provision profits than the consensus in the first quarter, although that’s not been reflected in the share price performance. As we reported last month, the UK banks trade at a significant discount to their European peers as the frustration rolls on for Lloyds investors despite the prospect of capital returns via dividends and buybacks.

The outlook for much higher interest rates and their potential impact on house prices and buyer demand meant investors resumed their flight from housebuilding stocks today.

The sector rallied between mid-March and late May but the gains during that turnaround have now been erased for Barratt Developments (LSE:BDEV), which fell 14.4p to 429.2p, and for Taylor Wimpey (LSE:TW.) after losing 3p to 105.25p, Persimmon (LSE:PSN) dropped 30p to 1162.7p.

There was also no respite for Paddington Central and Meadowhall landlord British Land (LSE:BLND), which this week dropped out of the FTSE 100 index and today fell another 6p to 329.9p.

Higher interest rates have caused investors to demand a greater return from their investments, with real estate not immune from that.

The impact of earlier rate hikes pushed the yield on British Land’s portfolio up by 71 basis points to 5.8% in the year to the end of March, causing a 12.3% valuation decline despite the benefit of 2.8% rental growth.

British Land was joined on the FTSE 250 fallers by shopping centre owner Hammerson (LSE:HMSO) and kitchens supplier Howden Joinery (LSE:HWDN), with the latter impacted by fears that households will cut back on home improvement projects as mortgage costs rise.

The UK-focused FTSE 250 initially fell 0.8% on the back of today’s inflation reading but later stood 0.3% or 58.33 points lower at 18,687. London’s top flight index, which benefits from having a much greater overseas earnings exposure, was down 14.29 points at 7555.02.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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