Here's Why UK Banks Plunged in October

Even as the BOE holds rates unchanged, rising yields kept the pressure on major UK banks last month as investors worry that inflation in the UK won't come down fast enough.

Clouds Still on the Horizon

Major banks reported somewhat results for the third quarter in the UK, with big names NatWest and doing better, while and HSBC saw income fall. However, the latter two's drop was due to one-off impairments and saw their net interest margin increase. So, overall, the general trend for major UK banks was positive. Despite this, however, the index of UK banking stocks to the lowest level in six months by the end of October, with the bulk of the losses recorded post-earnings and ahead of the BOE rate decision.

Natwest's 10% rise in November, things haven't fared better through the start of the new month, as gilts rallied in the wake of BOE's Chief Economist Huw Pill's comments that rate cuts might be sooner than anticipated. UK banks have been under pressure as they face an uncertain economic future, not just because of the worry over higher non-performing asset ratios but also the stagnant housing industry caused by high interest rates. St James' Place, for example, saw its shares 26% last month after it suspended trading in its property arm. Demand had fallen considerably, and investors pulled cash as the UK commercial property market cooled.

Not as Resilient as the FTSE 100

Understandably, investors would be a bit worried about the UK banking sector facing a property crisis since the last time Lloyds and NatWest had to be bailed out at the expense of shareholders. Both banks have struggled since. Generally, UK shares listed in the FTSE 100 are somewhat shielded from the domestic situation in the UK due to a large global presence. That's not the case for most UK-based banks. The major expectation, of course, is HSBC, but it has a large presence in China, where the property market is also extremely shaky.

UK average house prices have accumulated seven months of consecutive declines, in the latest portion of a downward trend that started in mid-2022 as the BOE started ramping up interest rates to fight inflation. Any glimmer of hope for rate cuts from Pill's comments this week that might help the housing industry was overshadowed by a strong insistence from BOE Governor Andrew Bailey that it's to talk about easing. UK Q3 GDP pretty much as expected over the quarter, leaving open ambiguity about whether the country is headed for a recession that could put increased stress on banks already facing a challenging environment.

Natwest Repelled at Lower Channel

Although far from confirming a bottom while trading within the descending channel, Natwest bulls rejected the golden pocket with a fakeout at the lower channel, opening up speculation for further advances towards 220. If the median Fibonacci shy past the 200 barrier or the upper descending trendline holds firm, prices could reverse below 61.80% of the 97.50-313 leg.

Source: SpreadEx Natwest

Key Takeaways

UK banks have faced double-digit declines in their stock prices due to concerns about inflation and an uncertain economic future in October. While major banks reported mixed results for the third quarter, the overall trend was positive. However, the index of UK banking stocks hit a six-month low, reflecting investor worries. The stagnant housing industry, high non-performing assets, and the vulnerability of UK-based banks to the property crisis have added to the pressure. Despite hopes for rate cuts, BOE Governor Andrew Bailey has emphasised that it is too early to discuss easing measures. The UK banking sector remains volatile, with potential for advances or reversals depending on various factors.