US credit rating agency Standard & Poor’s (S&P) has predicted UK banks will “ease” rather than “roar” into the 2020s as low interest rates, technological disruption and political risks present new challenges to the sector.
British lenders had a torrid 2019, with expensive misconduct charges denting their balance sheets and Brexit uncertainty casting gloom over the economy.
S&P’s report said a “rosier view” was appropriate after such a bruising year, predicting that banks would have an easier time in 2020.
The rating giant said that the arrival of some political certainty which came with Boris Johnson’s thumping election victory reaffirmed its judgement that UK banks are “stable”.
Nonetheless, it said that with interest rates set to stay at the ultra-low level of 0.75 per cent, banks’ earnings potential would remain muted. Low rates limit the so-called net interest margin of banks – the difference between the amount they pay out on deposits and what they can earn from investments.
“Fundamentally, it’s not that easy nowadays for a bank to make very strong returns,” said S&P’s financial institutions group director Nigel Greenwood.
Technological disruption will also prevent banks from “roaring” into the 2020s, S&P said. Challenger banks and fintech companies are responding to new ways of banking and competing against established high-street lenders for customers.
“I don’t think it would be surprising if there are merger and acquisition developments,” Greenwood said, “and of course that change in the political backdrop may make some firms more willing to do transactions than previously”.
S&P raised the possibility that big tech firms could be drawn to “the large and innovative nature of the UK banking sector”. It suggested that partnerships similar to that between Apple and Goldman Sachs in the US could develop.
Although Johnson’s election victory has certainly cheered many in the City, S&P said any benefit may prove to be “transitory” as the UK enters tough trade negotiations with the EU.
The report said: “Brexit is more of a process than an event and the UK’s future relationship with the EU remains uncertain.”