The performance of shares at most firms has since improved as the dust settled on Friday’s shock result, but Adrian Lowcock, head of investing at Axa Wealth, explained that banks could see their profit margins hit if the Bank of England votes for a Bank Base Rate cut next month, sending interest rates into negative territory.
This could lead to greater scrutiny around who banks will lend to and at what rate, he added.
“I think UK banks are in a financially robust position compared to mainland Europe, for example, but any reduction in profit margins will affect their commercial decisions,” Lowcock said.
“If the economic outlook has deteriorated and there’s an increased risk of recession, then there’s also an increased risk of bad debt as a result of certain loans granted previously. This also means the risk of customers entering defaults would also increase, which then affects banks’ profitability as provisions have to be set aside to offset against those bad debts.”
Shares in UK banks, housebuilders and estate agents took a bashing yesterday, with Virgin Money, Shawbrook, Foxtons, OneSavings Bank, Taylor Wimpey, Royal Bank of Scotland and Redrow, all appearing in the top 10 fallers on the London Stock Exchange at the same time.
Shares in Lloyds and Barclays were also hit hard by the referendum announcement as Brexit jitters set in among shareholders.
Investment research analyst Helal Miah from The Share Centre, explained that confidence is currently the most important indicator for the economy as growth looks set to be dampened, at least in the short-term.
“Brexit could have an impact on employment levels and potentially even a slowdown in consumer wage growth, so consumer confidence is certainly going to take a bit of a knock,” Miah explained.
“In the housing market, London seems to have taken more of a hit mainly because it’s more of an investment market. I expect there to be a lot more caution across the whole sector, which is why shares at property firms and mortgage lenders have taken an extremely big knock. For most people a house is the biggest purchase they’re going to make in their life so they’re not likely to enter into that transaction head first.”
