FTSE 100 Supported by Banks, But For How Long?

The UK's "big four" banks reported positive results in the second quarter, but further progress might depend on whether the UK's economy manages to gain momentum.

The Latest Developments

• The "big four" UK banks posted earnings that were mostly above expectations, supporting the FTSE 100.
• Rising credit impairments and slow loan growth provide a cautious outlook.
• British banks are facing a challenging landscape with slow growth, rising competition, and calls for even higher taxes.

Positive Earnings, But Not Across the Board

After the big UK banks reported over the last week, the FTSE 100 was higher on Wednesday in part , which announced a £1.0bn share buyback. The outcome aligns with the theme that British banks generally had positive earnings, with some performing better than others. Barclays' large trading division helped take advantage of increased market volatility amid the trade war to generate earnings that beat estimates. HSBC could be said to be at the other end of the spectrum, from its exposure to China but trying to entice investors with a $3.0 billion buyback program.

Lloyds' earnings were generally , as pre-tax profit increased as a result of provision releases. NatWest did a little better with a higher-than-expected net interest margin, which helped it raise its revenue guidance for the year. Overall, however, the banks remained cautious about the economic outlook, as illustrated by the slow release of provisions. British banks made the majority of their money from deposits and lending, meaning that a high-inflation, high-interest-rate environment could weigh on growth prospects.

The Changing Banking Landscape

British banks are also facing a wide range of challenges beyond an economy that is struggling to recover amid higher taxes and high interest rates. Chancellor Rachel Reeves has been fending off growing pressure from Labour MPs to while she tries to get Revolut a full banking license that would allow the online bank to compete with UK lenders. Loan growth over the last quarter was minimal, while impairment charges more than tripled from a year ago, showing British consumers are under pressure. That would make it challenging to increase demand for loans, particularly for mortgages, where high home prices combined with high interest rates continue to discourage buyers.

FTSE 100 Retests 50-Period MA

Supported by generally positive earnings so far, the FTSE 100 has trended higher over the last week but has witnessed a recent drop. However, the RSI suggests there could still be some headroom to keep growing despite some signs of a forming double top. A move above the record peak of 9170 could find the next resistance at 9250, while a break higher would expose the 9500 psychological level. On the flip side, further declines below the 50-period moving average at 9100, which is currently holding support, could send the index towards support near the swing low of 9080. If the index fails to form a double bottom, it may encounter support at the psychologically important 9000 level.

Source: SpreadEx | FTSE 100