UK banks are facing a much tougher year in 2024 than over the past twelve months, according to analysts at Liberum.
Much of Europe’s outperformance is set to reverse in 2024 as the rate cycle rolls over, loan books contract and weak economic growth test underwriting standards, believes the broker.
“The structural bear case for incumbent banks remains intact: the debt supercycle endgame, the return of lower-for-longer, unfriendly regulation and political interference, fintechs exploiting the break-up of the banking value chain, and the material tech debt."
Liberum believes the post-2022 rally was exceptional, a function of interest rates rising from zero, allowing banks’ net interest margins to normalise and partially reversing some of the post-2010 sector bear market.
"Rising interest rates through 2022 and 2023 provided a tailwind to bank earnings (via higher net interest margins) and share prices. As we roll into 2024 and the rate cycle appears to be at or near its peak, we believe the structural bear case will reassert itself.
"Cyclical and secular declines in loan growth, combined with competition from fintechs and non-banks, rising tech debt and unfavourable regulation will likely strain equity returns.
“We expect growth to continue decelerating in 2024 and likely turn negative.
“This reflects the combination of cyclical drivers (higher interest rates, economic slowdown and the lag effect) and broader secular headwinds.
“Remember, banks are effectively listed bonds where the coupon is variable and a function of the slope of the yield curve.
“Banks thus only sustainably outperform the market when the yield curve is positively sloped and falling at all maturities.”
Rating for the likes of Lloyds, 6.8 times PE ratio, Barclays 5.2 and Natwest 5.7 might look low but Liberum adds: ”History teaches us to be wary of optically cheap valuations."