The UK’s major banks are robust enough to cope with a no-deal Brexit but the sector’s outlook for 2019 will hinge on Britain’s exit from the EU, S&P Global Ratings has said.
The financial services firm issued a “broadly stable” rating on the UK banking system but said that view was based on an orderly Brexit.
While the company’s analysts said balance sheets were robust, a disorderly Brexit would pose some problems for the sector.
The report echoed the Bank of England’s findings last year that the UK financial system was resilient and would be able to continue to serve UK households and businesses even in the event of no deal and no transition period.
S&P Global credit analyst Osman Sattar said: “A no-deal Brexit could result in severe macroeconomic weakness, which would lead to rising personal and corporate U.K. insolvencies and weaker collateral values.
“In time, this would likely play through to banks' asset quality and activity, undermining earnings and, possibly, capitalisation to a modest degree.”
He added that these factors would be relatively greater for domestically focused lenders.
In November all of the UK’s major banks passed a beefed up stress test as the Bank of England praised the resilience of the UK financial system.
The seven banks – Nationwide, Santander UK, HSBC, Standard Chartered, Lloyds, Barclays and RBS – had three and a half times the capital ratio than before the global financial crisis, the bank said.
The stress test applied a scenario, which includes global GDP falling 2.4 per cent, UK GDP dropping 4.7 per cent, house prices falling 33 per cent and unemployment surging to 9.5 per cent, to test the financial mettle of UK banks.
The Financial Policy Committee said it was satisfied the banks could continue to serve UK households and businesses even in the event of no deal and no transition period.
The test found that the banks would suffer £70bn losses but still be able to weather the storm without raising more capital.