U.K. Banks Index Falls to 27-Year-Low Amid Rate Worries

(Bloomberg) -- A benchmark tracking shares of British banks closed at the lowest level since December 1992 on Thursday after the Bank of England left investors concerned that interest rates may drop further, hurting earnings for the sector.

The FTSE 350 Banks Index fell 1.8% amid a broader market drop as central bank officials indicated rates could fall below zero after the coronavirus has passed, while highlighting the potential drawbacks of such a decision to prop up an economy that’s been roiled by the outbreak. Such a move would further squeeze profit margins on loans.

“While the governors distanced themselves from negative rates in the near-term, the outlook for inflation was muted,” Fahed Kunwar, an analyst at Redburn, said by email. “As long as inflation remains subdued then rates will remain low or possibly go lower. This only increases the structural revenue pressures facing the U.K. domestic banks.”

The gauge was already down 46% this year heading into today’s decision amid fears the industry would face billions of pounds of bad debts due to measures to stem the pandemic -- something that’s been confirmed in earnings reports in recent weeks.

The index dropped earlier this week following an update from HSBC Holdings Plc in which it raised its estimates for problem loans and indicated it would miss a near-term cost-savings target. The Asia-focused group’s shares -- whose weighting in the FTSE 350 Banks Index exceeds 50% -- have also been subdued as it navigates worsening U.S.-China relations.

HSBC dropped by 2.6% Thursday, while the more domestic-focused Lloyds Banking Group Plc and Natwest Group Plc both fell less than 0.1%. Barclays Plc lost 1.4%.

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