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Fitch: Improving Performance at Major UK Banks but Challenges Remain
September 4, 2014 / 4:13 PM / 3 years ago

Fitch: Improving Performance at Major UK Banks but Challenges Remain

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Peer Report: Major UK Banks here LONDON/HONG KONG, September 04 (Fitch) Fitch Ratings says major UK banks have seen modest improvements in asset quality and profitability in an operating environment that is otherwise challenged by muted overall volume growth and growing regulatory requirements. In a special report published today, Fitch says the banks, which are leading players in UK retail and commercial banking, have benefitted from higher UK house prices and an increase in net interest margins over the past year, despite prevailing low base rates. The banks covered in this new report are Barclays Plc, Royal Bank of Scotland Group (RBSG), Lloyds Banking Group (LBG), Nationwide Building Society (NBS), Santander UK (San UK), and HSBC Bank plc (HBEU). Retail banking, heavily weighted towards mortgage lending, is the core business of NBS, LBG and San UK. It is also a sizeable business line for RBSG, Barclays and HBEU, although these groups are more diversified, both across product lines and geographically. While prime residential mortgage growth has been strong, overall loan growth in the UK has remained muted, with lending to corporates and SMEs remaining subdued. Furthermore, legacy portfolios (mostly related to commercial real estate but also Irish loans for RBSG and European loans for Barclays) have continued to be wound down. Generally improved market sentiment has allowed banks to accelerate their deleveraging. Therefore, while margins have benefited from very low funding costs and lower loan impairments, profitability has otherwise remained under pressure. This has partly been the result of still high costs. Despite announcing large scale lay-offs, restructurings and streamlining projects, costs have been affected by significant redress costs and fines, including redress for mis-selling of both payment protection insurance and interest rate swaps, LIBOR manipulation, and non-compliance with the Consumer Credit Act, among others. We believe that conduct costs and fines will continue to represent a significant risk for most major UK banks. Regulatory challenges remain, particularly in respect of increasing capitalisation and leverage requirements and in terms of conduct risk. Common equity tier 1 (CET1) capital ratios reported under the Bank of England's fully loaded Basel 3 methodology since 1Q14 are solid (they are dampened at HBEU by the large volume of trading assets booked there by the group). The ratios benefited from deleveraging and, in some cases, from fresh capital injections. However, the banks faced the upcoming UK variant of the European stress test, which may result in additional capital buffer requirements. These buffer requirements, as well as the form they will have to take, still cast some uncertainty over capital requirements in the system. Leverage ratios remain, in most cases, lower than generally seen internationally, reflecting the low risk weights associated with UK mortgage loans and the low ratios banks reported going into the crisis. The minimum regulatory leverage ratio - which has to be met by the eight major UK banks and building societies - including all institutions in this report - is 3% Tier 1, with the exposures measure calculated according to the January 2014 Basel III definition. The Bank of England is to provide feedback to the government by November 2014 on additional powers it could have to regulate bank leverage ratios; specific proposals being considered are leverage buffers above the 3% minimum and higher minimum ratios for G-SIBs and ring-fenced banks. All these banks therefore face potentially increased leverage requirements. All banks with more than GBP25bn 'core deposits', including all banks in this report, are exposed to business model risk resulting from the future implementation of ring-fencing as part of the UK bank reform. We expect HBEU and Barclays to have significant non-ring-fence operations. San UK and NBS are likely to be less exposed than RBSG and LBG: these two banks are expected to operate under a 'wide' ring-fence. As a building society, NBS is not directly subject to the legislation. Regulatory uncertainty remains as to the final rules around the height of the ring-fence - i.e. the extent to which activities are completely separated between ring-fenced and non-ring-fenced bank, and the location of the ring-fence i.e. which activities are inside and outside, and the extent to which banks have a choice over the aforementioned ring-fence issues. The peer review on UK banks, 'Peer Report: Major UK Banks', is available on Contact: Claudia Nelson Senior Director +44-20-3530 1191 Fitch Ratings Limited, 30 North Colonnade, London E14 5GN Christian Scarafia Senior Director +44-20 3530 1012 Denzil De Bie Director +44-20-3530 1095 Sabine Bauer Senior Director Hong Kong + 852 2263 9966 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: Additional information is available on ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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