In early December 2020, Deutsche Bank announced that it believed UK banks would struggle to meet their efficiency targets, for two reasons: the cost of COVID bounceback loan inflation, and a rise in non-performing loans. This stark warning from the bank came amidst further fears that rock-bottom interest rates could also impact on the UK banking sector’s performance, as well as Morgan Stanley’s prediction that UK bank shares could drop by 20% in the event of a no-deal Brexit.
The sector was also impacted by a ban on dividend payouts. In March 2020, the five largest UK banks cancelled dividend payments worth £7.5bn, undermining investor confidence and drawing criticism from many shareholders.
In early December, however, the Bank of England offered some hope when it announced the easing of the ban on dividend payments. “This is a sensible decision from the regulator”, said Goodbody analyst, John Cronin. “It was important in the context of sustaining and stimulating investor interest in the sector”.
And this wasn’t the only positive news for the UK banking sector late in the year. Just before Christmas, Metro Bank shares reached their highest level since COVID-19 first started to affect UK markets, after selling 20% of its mortgage book to NatWest.
On Christmas Eve, meanwhile, as a Brexit deal appeared to be on the horizon, shares in some of the largest UK banking groups surged during early trading. It is clear that 2020 was a year of ups and downs, so what can we expect for 2021?
Many predict that the banking sector will continue to be badly hit. Both consumer and business borrowing increased during 2020, as a result of both the need due to the pandemic and low interest rates. Debt charity Stepchange revealed that household borrowing and arrears linked to COVID-19 have soared to £10.3bn, with the number of people in severe debt rising to 1.3m. For banks, this could mean an increase in bad debt, on top of existing problems.
“It is hard to see how investing in UK bank shares is a sound proposition for 2021”, say The Motley Fool. Where will you choose to invest your money this year?
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