Shares in bailed-out lenders Royal Bank of Scotland PLC (LON:RBS) and Lloyds Banking Group PLC (LON:LLOY) have continued to underperform the market's benchmark since the Brexit vote, according to a strategy note from Barclays.
Although the domestically-focused banking stocks have recovered since the UK voted to leave the European Union last June, Barclays noted that they still trade at “relatively depressed” levels.
However, Barclays added, UK banks remain attractively priced and has moved Lloyds to its recommended portfolio.
In the note, Barclays assessed the performance of a selection of 30 domestic stocks with a high proportion of revenues from the UK.
“While these stocks have recovered somewhat post Brexit, on a cumulative basis they have still underperformed by near 20% relative to pre-Brexit highs,” Barclays said.
“Domestic UK remains one of the least favoured areas in the market for the majority of investors we speak with. With valuations near financial crisis lows, investors appear to be pricing in recession.”
Within the banking and travel sectors, Barclays found internationally focused stocks have led the post-Brexit recovery in performance, such as HSBC Holdings PLC (LON:HSBA), Standard Chartered PLC (LON:STAN), Carnival PLC (LON:CCL) and Intercontinental Hotels Group PLC (LON:IHG).
Lloyds exposed to performance of UK economy
Lloyds chief executive Antonio Horta-Osorio has previously warned that the bank’s performance is closely tied to the UK economy, where 97% of its business is focused. Barclays noted that Lloyds' revenue exposure to the UK is 100%.
At the group’s full year results in February, Horta-Osorio said the economic outlook was uncertain as the outcome of Brexit remains unclear.
Still the CEO has led a successful turnaround of Lloyds by cutting costs, offloading toxic loans and tackling its payment protection insurance mis-selling scandal.
In February, Lloyds reported its highest full year pre-tax profit in a decade and again impressed investors last month with a strong first quarter.
Last week the bank announced the UK government had sold its remaining stake almost a decade after pumping in £20.3bn to secure a 43% holding in the bank following its bailout during the financial crisis.
Lloyds said in a statement that taxpayers had made a £894mln profit from the sale of the shares.
RBS continues to struggle
RBS, which is still more than 70% owned by the government afetr its bailout, has not had as much luck in its restructuring efforts. Chancellor Philip Hammond has said that the government was likely to sell its shares at a loss.
The bank has been reporting annual losses since its £45.5bn government bailout in 2008 as it continues to tackle mounting misconduct and legal costs. In February it posted an eye-watering £7bn loss for 2016.
RBS set aside £800mln late last year to compensate shareholders suing the bank after its £12bn rights issue in 2008 and is expected to incur £125mln of legal fees.
READ: RBS court case adjourned as bank makes last-ditch offer to shareholders
The lender’s revenue exposure to the UK is 92%, according to Barclays, adding another hurdle should the economy falter after Brexit.
Investors pricing in UK economic recession, says Barclays
Barclays said investors are pricing in a collapse in economic growth to levels seen during the financial crisis.
The bank added: “The ultimate fate of domestically focussed UK stocks rests in the hands of the consumer. Household consumption forms c. 65% of gross domestic product.”
Barclays cited the latest survey from GfK that showed UK consumer confidence worsened slightly in April, due to worries about rising inflation and flat wages, but remained relatively stable.
“The dominant driver of consumer confidence, in our view, is real wage growth,” the bank said. “Today real wage growth is near 0%, driven by nominal wage growth at 2.4% and inflation at 2.7%.”
For a deceleration in real wage growth to materialise, Barclays said UK inflation needs to “pick up materially, or nominal wages to collapse, or a combination of the two”.
Barclays’ economists expect inflation to peak at 3% in the second half of 2017, fading to about 2.2% in 2018.
“A further spike in inflation that induces a collapse in real wage growth appears unlikely,” they said.
“Moreover, surveys now surprisingly suggest wage acceleration than deceleration.”