The banking sector has continued to lose ground in Monday trading as traders get to grips with the UK electorate opting for Brexit. Indeed, shares in Barclays (LSE: BARC) and RBS (LSE: RBS) had to be suspended in start-of-week business after the banks collapsed 11.5% and 14.2% respectively.
Although trading has since been restarted, Barclays has lost 26% since the referendum on Thursday, while RBS has shed 29%. And I believe much more weakness is in store.
Britain set to stall?
I’ve long argued that RBS’s narrow focus on the UK retail market — the result of massive streamlining following the 2008/2009 banking crisis — has significantly dented its long-term earnings profile.
This dependence on domestic customers to generate revenues growth makes the company even more of a hazard now that Britain has hit the ‘eject’ button. Indeed, rising speculation that Britain will hurtle into recession in the coming months bodes ill for the near term and beyond.
Passporting problems
While Barclays should also fear a tanking UK economy, the company’s significant exposure to foreign shores — and in particular the US — may take some of the sting out of the issue. But I wouldn’t break out the bunting just yet.
Indeed, a sneezing British economy is likely to spread the cold to the rest of the world. Besides, both Barclays and RBS face the prospect of rising costs and problems when it comes to selling their products abroad as ‘passporting’ issues could come to the fore.
And the pressure of already-low interest rates is likely to worsen should Britain’s economy require stimulation. Indeed, UBS expects the Bank of England to cut the benchmark rate not once but TWICE as the fallout of last week’s vote kicks in.
And I expect performance at Barclays’ Investment Bank to come under significant pressure as trader confidence sinks through the floor.
False value?
On paper at least, it could be argued that the risks facing Barclays are baked-in at current prices. The financial giant currently deals on a prospective P/E rating of 10.2 times, circulating around the benchmark of 10 times indicative of stocks with high risk profiles.
Still, this doesn’t mean that share prices are likely to stop sinking in the weeks and months ahead as the political and economic consequences of the Brexit vote are absorbed. And I fully expect earnings forecasts for the near-term and beyond to be downgraded by the City in the coming days.
Meanwhile, RBS deals on a forward P/E multiple of 12.9 times, a reading that falls well outside of the ‘bargain’ watermark.
With investor sentiment set to remain on a prolonged downtrend, and the banking sector one of the most dangerous sectors in which to stash the cash following last week’s vote, I reckon investors should steer well clear of both firms.
