High street banks may have to increase interest charged on loans or charge higher fees and commissions on their products in order to have enough money to cover capital buffers, according to one advisory firm’s calculations.
Simon-Kucher & Partners believes that the four main high street banks – Lloyds, Barclays, HSBC and RBS – will need to increase revenues by a combined £1.85bn to cover their share of the capital buffers recommended by the Bank of England (BoE) on Monday if they intend to retain current levels of profitability (or return on equity).
After performing its consumer credit stress test, the BoE announced this week that the banking system should hold an extra £10bn of capital to cover potential losses on consumer credit in the event of a downturn.
“The banks already have a very low return on equity, a poor level of profitability,” said Gianluca Corradi, head of banking at Simon-Kucher. Since several have been cutting costs, they have little fat left to shed.
This means they will have to push up revenues to find the extra money, Corradi said. Such a task could be achieved by increasing the interest rates on loans, or by charging larger fees and commissions on the other financial services they provide like foreign exchange or wealth management.
Corradi added that the in the UK, the revenue generated by banks compared to risk-weighted assets is already much lower than in France, Germany and the Nordics.
The BoE’s Financial Policy Committee said in its statement on Monday that it “expects that banks will begin to factor these market-wide levels of stressed losses on consumer credit into their overall lending and capital plans”. But it left individual banks to decide how this would be done.
All four major banks declined to speak to City A.M. about the figure. But sources in the industry said that the £1.85bn “sounds like an excessive estimate” while others added that the banks were “well capitalised” enough to deal with the increase in buffers.
As the rise of challenger banks continue, there may also be a concern that consumers could defect to smaller, lower cost firms and challenger banks if traditional financial institutions increase their fees and lending rates.
“There will always be a fraction of the population increasingly reaching out to challenger banks,” said Corradi. “But the customer loyalty to financial institutions is high, because it’s more of a pain to move an account for example than to pay the extra costs.”