12th March 2019

S&P report explores how UK bank results are testing received wisdom
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UK banks are well-placed to cope with whatever domestic politics may throw at the economy over the coming weeks and months as the UK's planned departure from the EU reaches its political crescendo, according to a report published by S&P Global Ratings, titled: "UK Banks: Looking At The Facts Rather Than Received Wisdom."

Recent full-year 2018 results for the major UK banking groups demonstrate resilient balance-sheet profiles and improved earnings capacity, which, among other things, support continued expectation for a robust 2019. Indeed, these results are not consistent with the received wisdom that UK banks will suffer once the UK leaves the EU.

But, banks are ultimately a function of the economy that they serve and a no-deal Brexit would be detrimental for the UK economy. This, in turn, could result in negative rating actions on UK banks, though such actions would likely be limited to bank-specific outlook revisions rather than downgrades in the near term.

Each major banking group announced similar or higher regulatory capital ratios than a year before, even after demonstrating their self-confidence by announcing improved dividends or in some cases either special dividends or share buybacks. In addition, reported liquidity levels are at unusually high levels and wholesale funding needs appear manageable.

S&P also views the banks' improved internal capital generation positively. Moreover, it assumes that material restructuring, conduct, and litigation charges, which have cost the four largest groups a combined £69bn over the past five years alone, are very much on the wane.

New loan loss provisions remained exceptionally low in 2018, for the fifth straight year, and remained well below the 30-year industry average of around 70 basis points. S&P estimates that provision charges would have to increase by around £13bn across the top six UK banks, from less than £5bn in 2018, for banks to reach this level in 2019, which appears unlikely.

Reported Stage 3 loans were benign, in the 1.3% to 2.6% range as a percentage of total loans at 31 December, 2018, with no sign of noteworthy deteriorations from Stage 1 to Stage 2 classifications; some banks did, however, take extra provisions in relation to their changed UK economic assumptions.

The key area of concern is the UK economy, which has been slowing in recent quarters, and may hamper lending volumes and credit quality as the year progresses. Additional areas of focus for S&P’s bank ratings include competitive dynamics, which are crimping new mortgage lending rates with no sign of abating year-to-date, and the need for bank management to remain vigilant to operational risk.

Ongoing industry difficulties in growing non-interest income, the increasingly likely absence of any UK base rate rises in 2019, and further investment in digital capability, are also likely to dampen enthusiasm toward earnings growth.

Across the eight largest UK banking groups that S&P rates, two have a positive outlook: RBS, in relation to its intrinsic creditworthiness, and Nationwide Building Society, in relation to S&P’s view of its additional loss-absorbing capacity.