UK Major Banks Fare Well Despite Credit Squeeze
Major UK banks are likely to have a strong year despite the recent credit crunch and a slowing UK economy, according to Fitch Ratings. However, 2008 could be more challenging to bank earnings.
In its latest Semi Annual Report, Fitch notes that the banks reported strong results in the first half of the year, reflecting a still relatively favorable global economy and a UK backdrop that has held up well, despite rising consumer bad debts.
All the banks covered in the report have large UK retail businesses, but Barclays, HSBC and Royal Bank of Scotland Group have more broadly diversified businesses, both by product and geographically, which would offer greater protection in the event of a sharp UK downturn. Other banks covered are National Westminster, Lloyds TSB and HBOS.
Key points from the report:
- UK consumer borrowing grew to an all-time high, and more UK borrowers have become stretched, partly through higher interest rates but also as a consequence of higher inflation in non-discretionary expenditure, resulting in a continued squeezing of household finances.
- Bankruptcy rates appear to have stabilized and most banks appear cautiously optimistic about the near-term trend in consumer arrears.
- Tighter (and more expensive) availability of credit following recent market turmoil will add further pressure in the absence of an interest rate cut, and impairment charges in unsecured books are likely to remain high in the second half of the year.
- UK residential mortgage lending continued to grow and although mortgage arrears increased from their cyclical low, they remain very low by historical standards.
- Structural supply features underpin UK house prices and, in the absence of a sharp sustained rise in unemployment and interest rates, a significant house price correction does not appear highly likely.
Exposures of the UK banks (both direct and indirect) to subprime and related risks appear very manageable, although some modest write-downs on assets which have become impaired or are suffering from illiquid markets appear inevitable.
- Availability of credit is likely to be affected to some extent by continued market turmoil, which has increased funding costs modestly and resulted in a realignment of lending margins.
- The potential for banks to have to take back onto their balance sheets conduit assets and leveraged loans originated for distribution, may further constrain credit growth in banks’ core businesses.
Recent market turmoil and remaining uncertainty in capital markets is likely to result in weaker earnings in wholesale and investment banking businesses in 2008, although the UK banks should be protected to some extent by their focus on customer-driven activities.
The full report UK Major Banks - Semi-Annual Review and Outlook is available for purchase.
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