Growing profits at the UK’s biggest banks will insulate them against economic and political shocks from Brexit with 2018 set to be “Year One” of a new post-crash era, according to a top ratings agency.
S&P Global Ratings said the prospect of rising interest rates, the long-awaited implementation of ring-fenced retail banks, and the start of open banking will see them leave behind the financial crisis, in a report published today.
The banking sector’s capital, funding and liquidity positions are “robust” after an improvement in 2017, while signs of worsening bank loan books remain limited.
Analysts led by Nigel Greenwood, S&P Global’s primary credit analyst, said: “We now view it as more likely that earnings will prove to be a useful first line of defense in the event of economic weakness or political disruption.”
Banks would need to see extra cash hits of £8bn this year to loan books to approach the long-term average, a prospect seen as “unlikely” by the report.
Net income is expected to rise over the course of 2018 for the sector as the long tail of big fines for pre-financial crisis wrongdoing starts to diminish meaningfully.
However, S&P warned that the chances of upgrades to credit ratings in the banking sector were limited because management have promised shareholders they will pay out capital as dividends rather than using it to bolster the strength of their balance sheets.
The promises to increase payouts to shareholders came as Britain’s big banks delivered relatively upbeat assessments of future performance during annual results reported last month, in a sign they are starting to truly put the effects of the financial crisis behind them after a decade of turmoil.
However, major challenges remain in the sector, with a US settlement for misconduct at Royal Bank of Scotland (RBS) expected to reach billions of dollars. RBS this week paid $500m (£362m) to New York authorities to settle securities mis-selling charges similar to those still to be decided by the US Department of Justice.
This settlement and others will likely make reported operating profits “flattish” for the 2018 financial year across the sector, S&P said.