British Banks Surge After Signs Emerge of Brexit Deal

(Bloomberg) -- British bank shares jumped amid optimism that a U.K. deal to leave the European Union would support domestic lenders.

Royal Bank of Scotland Group Plc rose as much as 16.4% on Friday, the biggest intraday rise since May 2010, and Lloyds Banking Group Plc gained as much as 12.5%, its largest increase since February 2016. Bonds of both firms rallied sharply, while Barclays Plc shares spiked as much as 7.2%.

The surge came after European Council President Donald Tusk said he’d received “promising signals” that a Brexit deal is possible, following talks between U.K. Prime Minister Boris Johnson and his Irish counterpart Leo Varadkar. The pound rose as much as 2%.

British banks have repeatedly said they are ready for any Brexit scenario. Still, RBS Chairman Howard Davies has also said there is “considerable uncertainty and considerable nervousness” in the U.K. economy. Some lenders have taken provisions to prepare for an economic slowdown and a surge in bad loans in event of a departure from the EU without a deal, and RBS is unlikely to hit profitability targets next year.

“Any deal is better than no deal,” said David Herro, chief investment officer for international equities at Harris Associates, which owns 2.86% of Lloyds shares and 2.05% of RBS. “Certainly Lloyds trades at a huge Brexit discount. And it’s the same thing for RBS.”

Both banks’ shares trade below the levels seen before the EU referendum that set the course for Brexit in June 2016. RBS is also under pressure from the prospect of a new election, as Jeremy Corbyn, leader of the opposition Labour party, has considered halting disposals of the government’s majority stake.

“Amid all the talk of a no-deal Brexit, the knee-jerk reaction to any sort of deal is positive,” Allan Monks at JPMorgan Chase & Co. said in a note to clients. “Many hurdles to a deal remain.”

©2019 Bloomberg L.P.

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