Time to buy underperforming UK banks?

UK domestic bank stocks are weak. This could be a warning sign for the UK economy.

Barclays (BARC), for example, is flirting with 52-week lows. Its prolonged downtrend from 220p is sapping investor confidence (see below).

RBS (RBS) has surrendered all its 2019 gains to trade near its psychological support at 200p. A further decline from here is not to be ruled out given the sharpness of its recent fall.

Lloyds (LLOY) has consolidated into the 55-56p support zone following a sharp rebound earlier this year.

Smaller banking stocks like CYBG (CYBG), owner of Clydesdale and Yorkshire Bank, and Metro (MTRO) are struggling too. Both stocks are trading near their multi-year lows. Metro, in particular, is embroiled in multiple problems.

The interesting question now is whether there is a contrarian play on the banking sector. Pessimism is weighing on the sector, partly due to falling expectations of the sector and partly due to Brexit.

Meanwhile, young technology-related companies such as Monzo, Revolut, and OakNorth, are snatching businesses from traditional High Street banks.

Still, if these domestic UK banks suffer another big drop, value is likely to emerge. Food for thought: JP Morgan’s current market cap of $350billion is 10x that of Barclays’. For now, we will just watch the sector closely and wait for some positive sector catalysts to emerge before buying for the long term.

 

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