The UK’s biggest banks look as well positioned as they can be for the possible turmoil of the UK’s exit from the EU, though the health of the post-Brexit economy is likely the most critical factor for future credit quality, says Scope Ratings.
Since the financial crisis, the UK banks have refocused business models, strengthened balance sheets and mostly dealt with legacy conduct issues, amid strengthened supervisory practices and regulatory requirements.
In aggregate, on a Tier 1 capital ratio basis, the major banks are estimated to be three times stronger than they were at end-2007, with the ratio now above 17%, according to Bank of England data.
“The large UK banks have largely completed the restructuring necessitated by the crisis, visible in significant improvement in solvency, liquidity, funding and asset quality metrics,” says Pauline Lambert, analyst at Scope.
Earnings are returning to more stable levels, while management seems focused on addressing the challenges from changing customer behaviour and new competitors, Lambert says.
Scope publicly rates Barclays plc (A+), HSBC Holdings plc (AA), Lloyds Banking Group plc (A+), and RBS Group plc (A); all with Stable Outlooks. Lloyds and RBS being primarily domestic banks while Barclays and HSBC are more geographically diversified. Regardless the extent of their activities in Europe, each has taken steps to prepare for a severe Brexit scenario.
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Barclays has expanded the capabilities of Barclays Bank Ireland to support the corporate, investment and private banking activities of European clients. HSBC is reorganising HSBC France to become the hub for its European operations.
The economic context is a concern though some indicators indicate a slowdown and others resilience. Brexit has already cost the UK economy at least 1.2% of GDP since the referendum, according to Scope, judged by comparing the UK’s quarterly growth against the performance of the its 10 largest trading partners between 3Q 2016 and 2Q 2018. The UK economy continues to grow slowly. For 2019, GDP growth forecasts range from 0.8% to 2%.
For now, the sluggish economy is not evident in banks’ loan portfolios. Asset quality metrics are stable overall and in some cases are improving.
“Banks are continuing to refine their strategies,” says Lambert. Barclays has said it wants to grow secured rather than unsecured lending in the UK, while reducing the duration and proportion of long-dated balance transfers in its credit card business. RBS is planning for loan growth in line with subdued GDP growth, urging managers to be cautious when extending credit.
Regardless of the Brexit outcome, Scope sees no return of supervisory practices and expectations to pre-crisis norms, while close cross-border supervisory collaboration and cooperation should continue given the reputation and track record of the UK regulator.