The UK bank results season will soon get into full swing, and it looks set to be an interesting one.
Last year, UK banks seemed to turn a corner: RBS returned to profit, most large players set ambitious cost saving targets for 2017, and an end to the PPI scandal finally came into sight.
However, in the face of significant domestic challenges, from consumer credit issues to the impact of Brexit, I’m not sure that our banks will be as optimistic heading into 2018 as their US counterparts appeared to be in their year-end results last month.
For Wall Street, 2017 threw up mixed results in the Markets divisions, but the overall outlook was promising. Trump’s largely unexpected tax reforms cost US banks a collective $33bn in deferred tax asset write-offs, yet several banks referenced the potential benefits the reforms could deliver, citing heightened M&A and improved economic growth.
Shareholders seemed to agree, as the share prices of US banks climbed steadily through January. Further, at Davos we heard the US hailed as “the place to be” in developed markets.
This is an interesting twist when we consider that, in several UK banks’ 2016 results, increased global protectionism and US politics were cited as cause for caution. I will be curious to see whether that rhetoric has changed this year.
The other main geopolitical event that dominated last year was of course Brexit. While the changes occurring in UK politics more broadly may have overtaken Brexit on the risk scale for some, our departure from the EU is bound to remain a talking point.
The moves we’ve seen in the last year to “Brexit-proof” operations are unlikely to make a notable dent in the upcoming results.
We estimate that around 500 UK bank jobs have been relocated, or been committed to relocating, as a result of Brexit. While this doesn’t take account of what non-UK banks in London are doing, it does seem that the loss of jobs is far less severe than many predicted.
Most firms have been making the minimal essential changes until there is more clarity on negotiation outcomes.
Perhaps of more relevant to banks’ continued UK footprint is regulation, like open banking, the Second Payment Services Directive, and the General Data Protection Regulation, which could radically challenge how and where people bank.
Finally, I’ll be looking for indications of how banks are managing the worsening credit condition.
The level of consumer debt in the UK is becoming critical: the market has seen annual growth of 10 per cent for the past few years. That cannot continue.
As interest rates steadily rise over 2018 and beyond, banks have to wean people off cheap credit and ensure that they have adequate provisions in place to manage the inevitable defaults. Under the new accounting standard, IFRS 9, these potential losses will need to be recognised earlier – something else to watch out for in 2018.
UK banks are undergoing a long-term transition with cultural, technological and regulatory changes happening apace. Managing unpredictable global politics, Brexit, and the consumer credit market will not make for an easy 2018.