Brexit, crisis ‘hangover’ keep UK bank shares undervalued, minister says

Shares of British banks are undervalued partly by lingering perceptions that they are still hampered by Brexit and a negative political climate toward the institutions, Britain’s financial services minister said on Tuesday.

Economic Secretary to the Treasury Bim Afolami told Reuters in an interview that those perceptions are unfounded and Prime Minister Rishi Sunak’s government is working to change them by being responsive to the sector’s needs.

UK bank shares (.FTASX301010) have struggled for much of the past year despite stability, lower risk and solid earnings, prompting Bank of England Governor Andrew Bailey to call their valuations a “puzzle” on Monday.

Afolami, who was in Washington as part of his first US visit since taking on his role in November, said banks were still suffering a “hangover” from uncertainty caused by Britain’s departure from the European Union.

“There are just some international investors that automatically took a discount to British banks because of Brexit, which I could understand when there was a real period of uncertainty in 2016, but I think it’s way unnecessary and overdue now,” Afolami said. “I think they’re making a mistake in that.”

Market players also may not have properly digested changes in the UK banking sector since the 2008 financial crisis, Afolami said, noting that NatWest Group (NWG.L) today is a far stronger company than predecessor Royal Bank of Scotland, which required a government bailout in 2008.

NatWest shares closed down 1.6 per cent on Tuesday at 204.4 pounds, nearly 100 pounds lower than a year ago.

“So what I say to the market is, work out before other people do that these banks are undervalued because, you know, Britain is a great place to be in banking,” Afolami said. “We’re making the right reforms, You’ve got a government that is really keen on listening to the views of the financial sector.”

The UK banking sector avoided last year’s interest-rate turmoil that caused US regional banks Silicon Valley Bank and Signature Bank to fail and prompted Swiss regulators to push Credit Suisse into a merger with larger rival UBS (UBSG.S)

As countries finalize implementation of Basel III capital accords, US regulators are seeking to impose tougher capital requirements for the largest banks, which are pushing back hard on the proposal. The move would partly reverse some relaxation of capital requirements for regional banks under the Trump administration in 2017.

Afolami said negotiations among Basel III signatories countries on the minimum levels needed were continuing. He declined to comment directly on the levels that US regulators were proposing, but said that Britain had previously taken a “very risk-averse approach” to regulating its banking sector. He said it is now relaxing some rules to ensure that there is adequate lending to small- and medium-sized businesses.

“I think the US, in times past, had a less risk-averse approach than we had, and America will make its own decisions as to how it chooses to regulate,” Afolami said. “From where we are, we start from a different place where the US system starts from.”

Afolami said Britain was determined to have “a collaborative approach” to the Basel rules would discuss the issues fully with US counterparts.