Shares in RBS fell 2.95% to 249.60p in morning trading while Lloyds dropped 2.49% to 68.92p and Barclays slid 1.02% to 203.30p.
Banks were among the biggest fallers on the FTSE 100 as Theresa May’s Conservatives emerged as the largest party but lost 26 seats to Labour, failing to secure the 326 majority seats required to win outright.
The Tories are expected to win a total of 318 seats while Labour is predicted to take 260 seats.
Could Labour form a coalitian?
For the Conservatives to form a government, they will need to agree a coalition with another party. The Tories gets the first shot at forming a coalition with most likely scenario a partnership with the Democratic Unionist Party, which tends to vote for the Tories.
If May can’t get the numbers needed to take her over the 326-mark, Labour has a chance to form a coalition.
Labour would have to explore a co-operation with parties like the Lib Dems, Scottish National Party (SNP), Plaid Cymru and the Green Party's sole MP Caroline Lucas.
The SNP, which was expected to be Labour’s go-to for a coalition, has secured just 35 seats so they would need another party to jump on board.
However, Labour has said it will not seek a coalition while Lib Dems leader Tim Farron also ruled out joining forces with the party or the Tories.
Soft Brexit a possibility, analysts say…
Colin McLean, managing director a SVM Asset Management, said he expected selling in the banking sector, property, retail and media as a hung parliament causes political uncertainty and is likely to delay Brexit talks.
In media ITV plc (LON:ITV) and Sky plc (LON:SKY) slumped while in property Taylor Wimpey plc (LON:TW), Barratt Developments plc (LON:BDEV) and Persimmon plc (LON:PSN) were on the back foot. Retailers Next plc (LON:NXT) and Marks and Spencer Group Plc (LON:MKS) were also under the cosh.
The UK was due to start negotiating its exit from the European Union on 19 June.
“A barely workable Conservative majority will certainly weaken Britain's hand in Brexit negotiations and may delay the start of talks this month,” McLean said.
“But recently investors seemed to think that a reduced Conservative majority might increase prospects for flexibility in negotiations and a soft Brexit. If anything can be taken from a confused election result, it is that the electorate does not want a hard Brexit.”
McLean said he does not expect another UK election for “quite some time” as Conservative MPs will want to push through electoral boundary changes through before they risk another.
Chris Beauchamp, senior market analyst at IG, told Proactive Investors the election result could mean Brexit is far less disruptive.
“A softer Brexit might mean we remain in the single market. There is the potential for freedom of movement to stay with us as well rather than Theresa May being able to walk into negotiating with the full backing of the people in parliament, he said.
“She has to be far more conciliatory and it’s a stark contrast to what we’ve had from her over the last few weeks.
“The market should be fairly appeased by that and that’s why I think we’ve seen relatively little downside to the pound.”
UK lenders likely to avert Labour's 'bank-negative' plans, says HSBC...
Ahead of the general election, HSBC also said a hung parliament could lead to a softer Brexit, particularly if Labour forms a coalition that includes the SNP.
“With the SNP opposed to Brexit, and Labour committed to seeing a ‘deal’ done on trade, we’re likely to see a ‘soft’ outcome to negotiations with the EU,” the bank said. “And that in turn could reduce downside UK economic risks (near term).”
HSBC had said a hung parliament would see sharp sell-off in UK banks' shares. But it added the result could spell good news for the sector as Labour does not have the majority seats to push through some of its “potentially bank-negative manifesto plans”.
HSBC said banks would have been negatively affected by Labour’s proposals for higher corporation tax, increased borrowing, restrictions on branch closures and a higher minimum wage.
RBS worst affected by Labour's plans...
RBS would have suffered the biggest hit due to Labour’s pledge to fully nationalise and break up the bank.
“It’s unclear how exactly this would be achieved, but we would anticipate that near-term the prospect would weigh on RBS’ share price,” HSBC said.
RBS is still more than 70% state owned after the government had to inject £45.5bn in a bailout during the 2008-09 financial crisis. It has since struggled to return to an annual profit and last year reported an eye-watering loss of £7bn.
In contrast, Lloyds Banking Group returned to private hands last month after the government sold its final stake in the bank almost a decade after its £20bn rescue deal. Unlike RBS, Lloyds has had a successful turnaround and in February reported its highest full year pre-tax profit in a decade.