UK banks post solid earnings despite misconduct fines

  • By Elizabeth Fry

The major UK banks reported solid underlying earnings in the first half of 2017, but misconduct charges pulled down their statutory returns on equity by a disappointing four percentage points.

"Underlying business performance was characterised by modest growth in net interest margins, progress on cost-efficiency programs, and still-low credit losses," said S&P credit analyst, Richard Barnes.

However, he noted non-operating charges such as conduct and restructuring provisions were once again a significant burden, lowering the five largest banks' average 9 per cent underlying RoE to a 5 per cent statutory out-turn.

"Reducing these charges remains the key to improved bottom-line earnings and we expect they should ease from next year," Barnes added.

Big five

The report covered the five biggest high street banking groups: Barclays, HSBC Holdings, Lloyds, Royal Bank of Scotland and Santander UK. Credit losses remained benign and showed few signs of the softening domestic economy, according to the lenders' interim results.

S&P economists expect UK GDP growth to moderate to 1.4 per cent this year and 0.9 per cent in 2018, largely due to squeezed consumer spending.

“Although gross household leverage is not far below the pre-crisis level, retail credit quality is currently underpinned by low unemployment and interest rates," it stated.

“Total lending is growing broadly in line with nominal GDP, but we see market segments where lenders, including challenger banks and non-banks, have become more aggressive on pricing and underwriting.

“We view this trend as a normalisation of banks' risk-averse credit standards of recent years rather than a return of pre-2008 excesses.”

Brexit implications

The Bank of England has warned that the prolonged low level of credit losses could cause lenders to become complacent about new business standards and it is deploying supervisory tools to prevent excessive growth in higher-risk products.

Brittan’s exit from the European Union has led Barnes to take a mostly negative view of the rated banks although he expects to gain more insight in the second half of the year on the path of Brexit negotiations and the possible implications for the economy and banking

Solid underlying earnings and the continued run-off of legacy, non-core assets resulted in a general improvement in the banks' regulatory capital and leverage ratios in the first half of 2017.

“Banks have further strengthened their balance sheets and are well-positioned relative to end-state requirements for capital and loss-absorbing capacity," said Barnes.

Requirements include the counter-cyclical buffer on domestic exposures, which the BoE has raised to 0.5 per cent from next June and will likely increase further to 1 per cent since months later as part of the central bank’s efforts to address retail credit growth.