European banks such as Lloyds Banking Group PLC (LON:LLOY), Royal Bank of Scotland Group PLC (LON:RBS) and Barclays PLC (LON:BARC) have rebounded strongly since last summer’s Brexit vote, but HSBC reckons the rally could be coming to an end soon.
The Asia-focused bank has downgraded the entire European banking sector, claiming that risk is likely to be “more balanced” over the coming quarters.
Analyst Robert Parkes thinks market optimism in the banking sector is “starting to fade” and expects it to “be more sensitive to any potential negative newsflow”.
Parkes adds that a market correction is likely just around the corner as well with the “very favourable combination” of loose monetary policy and rising growth expectations unlikely to be as supportive going forward.
Rates expected to remain lower longer
“We also detect a degree of market complacency regarding political risk in Europe and believe it is too premature to assume that this has abated,” wrote the analyst in a note on Wednesday.
“In Spain, the Catalonia situation is unresolved, Brexit uncertainty is undiminished and the Italian election must take place by May 2018 at the latest. History tells us that banks are likely to come under pressure in any correction.”
On top of those things, the HSBC fixed income team expects rates to stay lower for longer than what the markets currently expect, which is likely to be disappointment for the sector.