UK bank stocks have taken a beating this year. Lloyds (LSE: LLOY) shares, for example, have fallen below 30p, after starting 2020 above 60p. Similarly, HSBC (LSE: HSBA) shares have fallen to near 300p, after starting the year around 600p. Meanwhile, Barclays (LSE: BARC) shares are currently under 100p, after starting 2020 near 185p.
Can these UK banks stocks recover? I think it’s certainly possible. After all, banks stocks have crashed before and rebounded. That said, a recovery is likely to take time. And there are a few things that need to happen.
Why have Lloyds, HSBC, and Barclays shares crashed?
The main reason bank shares have crashed this year is that economic conditions are woeful. As a result of Covid-19, businesses are struggling and this is resulting in an increase in loan defaults. This is bad news for the banks. Their profitability is taking a hit.
HSBC, for example, recently advised that it has seen a “material increase” in expected credit losses and other credit impairment charges (ECL). Lloyds, meanwhile, registered £3.8bn in impairment charges in the first half of the year.
If economic conditions begin to recover, banks will benefit. Subsequently, their share prices could rise.
Another key reason bank shares have crashed this year is that interest rates have plummeted. Low interest rates are not good for banks. This is because they earn a lot of their income from the spread between the interest rates they charge to lend money and the interest rates they offer to borrow money. The lower interest rates are, the less opportunity there is for banks to profit.
I expect that we will be stuck with low interest rates for a while. However, eventually, rates may begin to rise. This could push bank stocks higher.
Can UK bank shares recover?
Looking beyond these issues, there are a few other things that need to happen for UK bank stocks to fully recover.
Firstly, the banks need to stay out of trouble. Recently, HSBC has been in the news in relation to money laundering allegations. Leaked documents showed that the bank had moved vast sums of money around the world for criminals. This hit the share price. Meanwhile, Lloyds was plagued by PPI charges for years. Banks need to clean up their act and avoid being fined by the regulators.
Secondly, we need to see dividends reintroduced. Earlier this year, the Bank of England banned UK banks from paying dividends due to Covid-19. The reintroduction of dividends could see interest in bank shares increase, pushing their share prices up.
Finally, banks need to ensure that they innovate. Right now, the financial services industry is evolving at a rapid rate. Digital banks such as Monzo, Revolut and Starling, and FinTechs such as PayPal, TransferWise, and Monese are changing the game for consumers. Lloyds, HSBC, and Barclays need to join in to protect their market share.
UK bank stocks: slow recovery
In summary, a recovery for UK bank stocks is possible. However, a recovery is not going to happen overnight.
As such, if you’re looking for investment opportunities right now, you may be better off ignoring Lloyds, HSBC, and Barclays and focusing your attention on businesses with stronger growth prospects.
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Edward Sheldon owns shares in Lloyds Bank and PayPal. The Motley Fool UK owns shares of and has recommended PayPal Holdings. The Motley Fool UK has recommended Barclays, HSBC Holdings, and Lloyds Banking Group and recommends the following options: long January 2022 $75 calls on PayPal Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.