S&P Report says limbo state lingers for UK banks

29-Aug-2019

Despite the prolonged state of political and economic limbo in the UK, S&P Global Ratings believes that banks remain broadly resilient in the run up to Brexit. As noted in a report published today, recent half-year results from the major UK banks show robust asset quality metrics, stable capital, and healthy liquidity and funding. Together, these strengths provide a stable foundation from which to weather uncertainties arising from the outcome of Brexit, or other factors such as trade tensions threatening a global economic slowdown.

Having achieved end-state capital levels in prior years, many banks met our expectations and increased capital distributions. We think that our current view of stable ratings remains appropriate, albeit with a heightened awareness of the more nuanced operating environment anticipated for the remainder of the year.

Bank management has referenced more risk-averse behaviour by large corporates, with higher deposits and moderating loan growth--symptoms of delayed investment decisions. While we see potential for a rebound in 2020 activity should a Brexit agreement materialise, we also anticipate an uncertain period dominated by a potential no confidence vote, snap election, and/or no-deal Brexit. Moreover, management tone suggests a general bias toward countering margin pressure with aggressive cost control, rather than increasing risk appetite.

Relentless competition in the UK mortgage market has squeezed net interest margin (NIM) for many quarters and we expect this could intensify as additional headwinds have emerged. Exceptionally low and inverting yield curves, and higher standard variable rate attrition, have accelerated the pace of NIM erosion beyond that induced by deployment of trapped liquidity by ring-fenced banks.

Our base-case economic forecast assumes that the UK will not leave the EU without a deal, and we expect UK bank ratings will remain broadly stable under this scenario. That said, our current ratings or outlooks are unlikely to be consistent with a disruptive Brexit. Banks are ultimately a function of the economy that they serve. For investment-grade ratings, we take a long-term view of an entity's creditworthiness and expect that a highly rated bank can withstand a typical recession, perhaps with only a one-notch downgrade during the period, absent bank-specific problems. Our generally supportive view of UK bank capitalisation, asset quality, and funding and liquidity profiles supports this expectation.

This report does not constitute a rating action.