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UK banks improve stability and see assets at record levels

Chris Cummings

The UK is the leading centre for international banking and home to several of the largest global banks. Its banking sector assets were up 3% in 2011 to a record £8,119bn according to TheCityUK report Banking 2012. Although profitability has declined about 10% during the year, banks in the UK have made significant progress in repairing balance sheets, improving capital and funding and are in a better position than other large European countries on a variety of measures.chris

Banks have, according to the report, reduced reliance on wholesale markets to fund lending, with loan-to-deposit ratios declining 4% on average in 2011 to 102%. Deposits in the UK have grown faster than loans since 2009, narrowing the funding gap to 8% of lending in 2011 from 24% at the outset of the credit crisis. UK banks have also reduced leverage ratios, to just over 20 times in 2011 from over 40 times three years earlier, with leverage set to decline further as banks transition to higher capital requirements under Basel III. However, credit availability and lending remains constrained, in common with other developed countries.

The UK banking sector’s direct exposure to vulnerable sovereign debt in Greece, Portugal, Italy, Spain and Ireland totalled around £15bn at the end of Q3-2011. UK banks have larger exposures to the private sectors in these countries of over £190bn. This was considerably less than, for example, France and Germany, which had overall exposures of over £400bn and £300bn respectively, and more than four times the UK’s direct holdings of vulnerable sovereign debt.

The UK had the second largest banking sector assets in the world, after the US, in 2011. Foreign banks held 48% of the total, a higher proportion than in most other large countries. The UK is the leading centre for international banking, and home to several of the largest global banks. Its 19% share of cross-border bank lending was the highest in the world. The 251 foreign banks physically located in the UK is more than in any other centre. The UK is also one of the most important centres for private and investment banking and Islamic banking.

Figures for the global industry show that assets of the largest 1,000 banks grew by 6.4% in 2010/11 to a record $101.6 trillion, with the highest growth registered in China. TheCityUK forecasts a further 6% increase in industry assets during 2011/12. Banks from emerging market countries have on the whole been less affected by the economic slowdown, and are expected to drive growth in the coming years. In Europe, the increase in sovereign risk in some countries and concerns about government debt levels have spilled over into the banking system, raising the cost of borrowing for many banks and depressing their market capitalisation. According to the report, banks around the world have over $3.5 trillion in wholesale funds which will need to be refinanced in 2012 and 2013. This is made more difficult in some European countries by an increase in funding costs and sharp rise in bank debt yields resulting from an increase in sovereign risk.

Investment banking

Global investment banking revenue totalled $70.3bn in 2011, down slightly on the previous year. Fee revenue of $42.1bn generated during the first half of 2011 represented the strongest start to a year in four years. However, business activity then slowed. The $15.7bn fee revenue generated in Q1-2012 was down a fifth on the same period in 2011.

Business activity from mergers and acquisitions advisory work has fallen considerably since the start of the economic slowdown, and accounted for 27% of revenue in 2011. Equity underwriting, fixed income underwriting and syndicated loans business each accounted for around a third of the remaining business. The US was the source of 54% of business, its highest share in five years. Europe’s share declined during this period to a quarter from close to 40%, partly a result of sovereign risk concerns in some countries. Asia accounted for around a fifth of the total, nearly double its share four years earlier.chart

Companies in the UK were the source of $3.3bn of global revenue in 2011, down 15% on the 2010 figure. This represented around 4.6% of global fee revenue making it the fourth largest market behind the US, China and Canada. Although the UK was the source of around a fifth of European investment banking fee revenue, around a half of European investment banking activity was conducted through London. The majority of investment banks are either headquartered or have a major office there. The largest international banks in the UK each employ several thousand people.

Companies in the financial sector have consistently been the source of the highest share of investment banks’ business over the past decade, both globally and in the UK. Their 22% global share was ahead of energy and natural resources (20%) and industrials (15%), which both saw a 6% increase in revenue to $14.1bn and $10.8bn respectively. Other fee generating industries included consumer and retails (10%) and technology and healthcare (7% each).

Contribution to the economy

The UK banking sector is a crucial and integral part of its economy. Net exports of UK banks totalled £25bn in 2010 helping to offset the trade in goods deficit. The UK banking industry contributed £56bn to the economy in 2010, equivalent to 4.8% of GDP, or over half of the 8.9% generated by the financial sector as a whole. Foreign direct investment into the UK banking sector more than doubled over the past decade to reach £63.3bn in 2010. During this period outward direct investment grew more than five-fold to £83.4bn.

Banks located in the UK provide employment for 454,200 people. London accounts for 31% of this, followed by North West 10%, Yorkshire 10%, Scotland 9%, the South West 8% and the South East 8%. Other cities outside of London with large employment in banking included Edinburgh (15,100), Leeds (14,500) and Birmingham (12,500).

By Chris Cummings, Chief Executive of TheCityUK

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