Investors may well ask how cheap bank shares need to become before anyone decides to buy them again. According to Numis, the sector average price/earnings (PE) ratio is heading towards 5 for the UK’s domestic banks. With interest rate cuts looking at least plausible this year, the associated shrinkage in net margins – and the possibility of a further slowdown in economic growth ahead of those base rate cuts – mean you could be forgiven for thinking that UK banks' best days are behind them.
Inevitably, the outlook is more nuanced than this scenario implies. A resilient consumer, coupled with interest rates that are lower but still far from the floor (analysts are working on a base rate assumption of 3.25 per cent by 2026) could mean fewer delinquent debts and wider margins.
In any case there are some banks, particularly the smaller niche players, that have shown they can navigate the recent headwinds. In this context, questions have to be asked about whether scale has delivered the promised savings that the market demands. Consider also that challenger banks are slowly but surely eating away at the market dominance of the big five high-street banks when it comes to underserved niches.