Resiliency of UK banks & Strength in EU earnings trends – Comment by RBC Wealth Management

By Thomas McGarrity, Head of Equities for RBC Wealth Management in the British Isles

In the UK, private sector pay growth reached 7.7% on a three-month annualized basis, up slightly from the prior period. Key drivers underpinning the continued surge were higher inflation expectations on the part of consumers and businesses and a tight labour market

Inflation expectations have slightly moderated, and with the labour market starting to loosen, it is reasonable to expect wage growth to start to abate over the next few months, in our view. Yet the high wage growth could sway the Bank of England (BoE) to opt for another 50 bps interest rate increase at its policy meeting in early August. However, the decision will also depend on the release of next week’s inflation numbers. 

All the major UK banks passed the BoE’s 2022/23 stress test, with no individual bank required to strengthen its capital position. The results indicated that the major UK banks would be resilient to a “severe stress” economic scenario (i.e., one that would be more severe than the 2007–08 global financial crisis and substantially worse than currently expected by the BoE and consensus). The stress test results support our view that UK banks are strongly capitalised amid the prospect of a weakening macroeconomic environment. Nonetheless, while we do not expect changes to forthcoming share buybacks by the group, we believe renewed positive economic momentum is needed for UK bank shares to re-rate materially higher.

Although European equities have underperformed global equities by around 9% in U.S. dollar terms over the last four months, the region’s earnings trends have been more resilient. The consensus forward 12-month earnings per share estimate for the region increased by 3% during that time, despite a deterioration of the euro area macro backdrop. As a result, the valuation discount of the European equity market relative to global equities, using the MSCI All-Country World Index as the barometer, has widened to an all-time high. Notably though, there have been large divergences in earnings trends beneath the market’s surface. For example, there have been notable downgrades to consensus earnings expectations for the European chemicals sub-sector after profit warnings from several companies because of extensive destocking. Conversely, earnings expectations for European banks have continued to be upgraded, reflecting that higher interest rates are being passed on to borrowers quickly but to depositors with a delay, while bad debts continue to be benign.

Related Articles

Sign up to the Wealth DFM Newsletter

Please enable JavaScript in your browser to complete this form.
Name

Trending Articles

IFA Talk logo

IFA Talk is our flagship podcast, that fits perfectly into your busy life, bringing the latest insight, analysis, news and interviews to you, wherever you are.

IFA Talk Podcast – listen to the latest episode

Wealth DFM
Privacy Overview

This policy explains how IFA Magazine collects, stores use, and shares personal information (including but not limited to information from which you can be personally identified such as your name, address, job title, company, email address, or telephone number) and information about your visits to the network, including the pages you view, the links you click and other actions taken in connection with www.ifamagazine.com, www.gbinvestments.co.uk, www.robopromedia.com, www.mvpromedia.com.

IFA Magazine Publications Limited may update this Policy at any time. It is your responsibility to check for updates to this Policy, as your continued use of the website denotes an acceptance of this Policy. Unless stated otherwise, IFA Magazine Publications Limited’s current Policy applies to all information that IFA Magazine Publications Limited has about you and your account.