Banks are certain to soon be wading through a flood of bad debts and write-downs as the coronavirus pandemic hits companies from airlines to pubs and restaurants, but analysts are confident of the sector's ability to cope.
Sector shares have slumped hard over these fears, as well about some banks' exposure to the oil sector, where major write-downs are likely after the oil price more than halved since the start of the year.
Across Europe, bank market capitalisations have fallen by an aggregate €420bn in the last month, with shares down 39% versus the 30% fall for the wider European market.
Most major European banks are now trading above the levels they sank to in the financial crisis on a price-to-book value multiple, even though the widening cost of borrowing in the market indicates the concerns about potential asset impairments.
Indeed, higher risk costs from Covid-19 and the collapse in oil prices led analysts at RBC Capital Markets on Tuesday to slash their sector forecasts for 2020 and 2021 by 30% and 20%.
RBC's assumption is that the banking sector will see a demand-driven decline in lending rather than a proactive and aggressive deleveraging by the banks themselves.
Central bank and government support essential
Monetary easing measures announced last week by the Bank of England included giving banks more leeway in their capital requirements by reducing the countercyclical capital buffer rate and incentives for SME lending, while the European Central Bank is also allowing banks to temporarily go through liquidity ratios and capital buffers.
Thanks in part to this, and further measures expected from finance ministers including Rishi Sunak, analysts have been expressing confidence that the sector can handle the corona crisis and indeed that their shares are already good value.
At Citigroup, the banking team said with the falls in bank shares, "on a 12-month view we would be happy to step in and buy the UK and Irish banks here", with UK banks trading on only 6-8 times forwards earnings, 2-3 points lower than the sector's historical average.
While cutting cut earnings and target prices for all banks, Citi's analysts said in a note on Friday they "believe share prices have moved too far and [we] see long-term value here".
RBC's analysts said banks have “considerable capacity to deal with write downs” and provide credit, though if banks burn through their buffers and deliver a return on the new capital base of 50% of the 2019 level, of course most will see some downside.
Share valuations
RBC therefore also cut its share price targets for all the UK banks.
Of the FTSE 100 names, HSBC PLC (LON:HSBA) was cut the least, down 15% from 520p to 440p; followed by Royal Bank of Scotland PLC (LON:RBS) by 23% from 200p to 155p; with Lloyds Banking Group PLC (LON:LLOY) cut 29% from 66p to 47p; and Barclays PLC (LON:BARC) also cut 29% from 170p to 120p.
Among the challengers, Metro Bank PLC (LON:MTRO) was given the harshest cut of 48% to 150p; followed by Virgin Money UK PLC (LON:VMUK) by 31% to 145p; OneSavings Bank PLC (LON:OSB) by 24% to 390p; Close Brothers Group PLC (LON:CBG) by 21% to 1,150p; and Paragon Banking Group PLC (LON:PAG) by 20% to 390p.
Versus last closing prices, this implied the most potential upside in Lloyds, RBC and Barclays and the least for HSBC among the big caps, while the most upside among the challengers was seen at Virgin Money and OneSavings.