Tuesday 3 December 2019 2:50 pm

Moody's downgrades outlook for UK banking system

The UK banking system’s outlook has been downgraded by credit ratings agency Moody’s, after it cited a swathe of challenges facing lenders in the year ahead.

Flagging the persistently low interest rate environment and a competitive mortgage market, Moody’s is forecasting a modest slide in profitability.

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The agency has cut its predictions for UK banks from stable to negative, warning of a worsening operating environment.

“The UK’s economy is weakening, making it more susceptible to shocks, and prolonged uncertainty over Brexit has reduced the country’s growth prospects,” said Laurie Mayers, associate managing director at Moody’s.

Mayers added: “Meanwhile, persistently low interest rates and increased mortgage market competition are eroding the net interest margins of most UK lenders. These challenges will outweigh the sector’s strong capital and liquidity buffers, and an expected decline in banks’ conduct costs.”

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Yet some large lenders will likely report higher net profit in 2020, helped by a sharp fall in conduct costs after an August 2019 deadline for compensation claims for mis-sold payment protection insurance (PPI), Moody’s said.

Unprecedented PPI costs took a bite out of banks this year after a record number of claims were made in the run-up to the PPI complaint deadline being closed.