Banks and the election: situation normal

Has so much changed? Investors piled into UK bank shares on Friday after the Conservative party's election victory. Lloyds Banking Group shares rose by almost 7 per cent - more than three times the market's gain - as fears of an increased bank levy under the Labour party dissipated. Yet investors' post-election exuberance is premature.

True, the risk of Labour's less-disciplined economic approach has evaporated. Continuity of the fiscal discipline - and economic recovery - of the past five years is positive for banks. Bad loans should keep falling, boosting bank profits while their revenue is so subdued. And the threat of state-controlled Royal Bank of Scotland being turned into a regional banking experiment has also gone.

The state's sell-off of Lloyds shares can continue - preferably without the distraction of a public offer. And the sale of RBS (up 5 per cent) can begin in earnest. The Conservatives' cherished challenger banks should flourish in a property market undistorted by the mansion tax plans of Labour. Shares in Virgin Money and OneSavings Bank rose on Friday.

But banks will still be a favourite target for politicians to bash. This year the Conservative-led government lifted the bank levy target by £900m to £3.4bn. Labour planned to add an extra £800m, which would have wiped 2-8 per cent off next year's consensus earnings, on Bernstein estimates. And there is a competition inquiry under way into the current account and business banking markets. All this regulation has made HSBC ponder anew whether to stay in the UK. Its foreign rivals might beat it to the exit - albeit for different reasons.

After all, the biggest risk now is that the UK leaves the EU following a 2017 referendum. Before then, banks will lose business if companies shelve plans to invest in the UK.

So while little has changed for UK lenders, the EU elephant could easily crush today's bank bulls.

E-mail the Lex team at [email protected]

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation