The Bank of England has asked banks if they are prepared for interest rates to fall to zero and into negative territory, while some analysts are seeing the sector screaming value.
Policymakers at the bank have been mulling whether to further loosen the UK’s monetary settings in order to cope with the economic shock from the coronavirus pandemic.
The Bank’s Prudential Regulation Authority wrote to the country’s lenders to test their “current readiness to deal with a zero Bank Rate, a negative Bank Rate, or a tiered system of reserves remuneration – and the steps that you would need to take to prepare for the implementation of these”.
Noting that “the financial sector … would need to be operationally ready to implement it in a way that does not adversely affect the safety and soundness of firms”, the Bank said that policymakers “may see fit to choose various options based on the situation at the time”.
Minutes of the last meeting of the Bank’s Monetary Policy Committee showed discussion of negative rates, with one member, Silvana Tenreyro, backing negative rates though others remaining opposed, with BoE governor Andrew Bailey stressing that it could certainly be avoided and there is no rush to take this route.
“The problem for the Bank would be an unemployment crisis into Christmas that could put pressure on the MPC to act,” said Neil Wilson at Markets.com.
However, money markets have already priced in negative rates next year and bank shares have not reacted.
Indeed, with investor interest in UK banks at an all-time low, analysts at Citigroup said they believe “this presents an opportunity” for investors.
Large-cap UK banks now trade on only 0.3-0.5 times tangible book value, lower than during the 2008 crisis.
The analysts think 2020 consensus EPS forecasts have now “troughed” and expected credit loss assumptions from the coronavirus crisis are already embedding conservative unemployment scenarios.
They see “limited incremental downside risk” from a no-deal Brexit versus the suggested rudimentary free-trade agreement with the EU.
Furthermore, the Citi number crunchers expect “sizeable” capital returns to resume from February 2021 onwards.
The upcoming third-quarter results should see all the banks beat consensus forecasts for underlying profits before loss provisions, is Citi’s view, with biggest beat at Barclays.
“We expect domestic banks to also beat on impairments, most notably Lloyds.”