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Fitch: Brexit Impact on UK Bank Ratings Dependent on Terms
May 24, 2016 / 1:16 PM / 2 years ago

Fitch: Brexit Impact on UK Bank Ratings Dependent on Terms

(The following statement was released by the rating agency) LONDON, May 24 (Fitch) Only the unfavourable Brexit leave scenario set out in our cross-sector 'Leave or Remain: Hypothetical Brexit Scenarios' report could put some UK bank ratings under pressure, says Fitch Ratings. If exit terms negotiated with the EU were unfavourable, bank funding profiles, asset quality and earnings could suffer. But our base case is that the UK will vote to remain in the UK and this scenario would be mildly positive for banks as funding rates could ease, supporting banks' overall funding plans. The core unfavourable leave scenario assumes negotiations for an exit and trade agreement with the EU prove rancorous and protracted, with other EU members looking to promote national interest and gain advantage in a number of areas, including financial services. Sterling could suffer 30% depreciation and there would be a technical recession in the near term, with house prices falling and base rates rising faster than under Fitch's base case to deal with higher inflationary pressures. Additional uncertainty would arise if the exit triggered a subsequent Scottish vote for independence. Under the core unfavourable leave scenario, we would expect the quality of lending across residential mortgage, commercial real estate (CRE) and parts of banks' corporate portfolios to worsen. Performance of residential mortgages, particularly in the buy-to-let (BTL) portfolios, would likely come under pressure, driven by weaker demand, falling house prices and higher interest rates. Commercial real estate (CRE) values would be affected by a range of factors. Within corporate loan books, some strains could emerge, and sectors such as housebuilding and retail would weaken from current levels. We would expect funding costs for the UK banks to increase under an unfavourable scenario, impacted by uncertainty. This could make it harder and more costly for some of the larger banks to build up loss-absorbing debt buffers needed for resolution planning, at least in the short term. Nonetheless, UK banks' liquidity profiles are strong, so they are well placed to face the impact of an unfavourable scenario. Under the unfavourable scenario, foreign banks would likely bolster operations in the EU and move some operations requiring an EU banking licence, for example, to Frankfurt, Paris or Dublin. But the UK might offer incentives to support the important financial services industry. Alternatively, if the UK successfully negotiated exit terms and a favourable trade agreement could be concluded within a reasonably short period, bank ratings are unlikely to be affected. Under the hypothetical favourable exit scenario, asset quality would be resilient overall but continued 'lower for longer' interest rates would put pressure on margins. The favourable exit scenario assumes only a mild erosion of free trade in financial services. Some of the more international UK banks, such as HSBC and Barclays, would likely need to bolster their presence in the EU moderately. This would result in additional restructuring costs but these are unlikely to be material. Foreign banks with major operations in the UK would be in a similar position. In the event of a leave vote triggering a Scottish vote for independence, Scotland registered banking groups such as Royal Bank of Scotland and Lloyds Banking Group would incur further restructuring costs. Additional risks may arise in the event of a secession being disorderly. A teleconference to discuss our Brexit "Leave or Remain" scenarios is being held on 26 May at 9.00 a.m. and 4.00 p.m. UK time. The report, published on 16 May, can be accessed by clicking on the link. <ahref="http://event.onlineseminarsolutions.com/r.htm?e=1195996&s=1&k=161905B12C 2538DEEF47E913E12B7CED">Click here for an invitation to the 9:00 am teleconference. <a href="https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=86 7529">Click here for an invitation to the 4:00 pm teleconference. Fitch Ratings is not recommending any particular position, vote or outcome regarding the referendum vote on June 23, 2016. This research simply provides the financial marketplace with increased transparency as to the possible impact on our ratings of various hypothetical outcomes from the referendum. Contact: James Longsdon Managing Director, co-head Financial Institutions EMEA + 4 203 350 1076 Fitch Ratings Limited 30 North Colonnade London E14 5GN Janine Dow Senior Analyst, Fitch Wire +44 20 3530 1464 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Related Research Leave or Remain: Hypothetical Brexit Scenarios Examined here 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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