THE biggest barrier to growth for the UK’s major banks this year is the uncertain economic outlook arising from the latest national lockdown, not the lack of clarity on whether financial services firms can access markets in the European Union (EU) after Brexit, a leading City analyst has declared.
The share prices of Royal Bank of Scotland owner NatWest Group and Lloyds Banking Group fell sharply between Christmas and New Year, amid a sell-off believed to be sparked by continuing uncertainty over access to EU markets.
However, the European issue was given short shrift by Michael Hewson, chief market analyst at London-based CMC Markets, who pointed out that both NatWest and Lloyds have limited exposure to the continent.
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Mr Hewson said the further dampening of economic activity brought by the latest national lockdown is the biggest challenge facing UK-focused banks. He will be looking at the full-year results from NatWest and Lloyds in February for signs of further provisions being made for loan defaults, having previously been satisfied enough had been set aside, prior to the latest lockdown.
Both NatWest and Lloyds have already set aside billions of pounds in anticipation of bad debts spiking amid the fall-out from coronavirus. In October, NatWest said it expected full-year impairments for 2020 to be at the lower end of its £3.5 billion to £4.5bn range. Lloyds expects charges for Covid-related losses to be between £4.5bn and £5.5bn. Now, with another national lockdown in force, the pressure on businesses and households is set to ramp up again.
Describing the notion of a link between last week’s sell-off and the European access issue as “nonsense”, Mr Hewson said. “The biggest risk is the extended lockdown and [the prospect] of rising defaults. We will be looking to see if the banks make extra provision for non-performing loans. At the moment, [defaults] are below the threshold.”
He added: “Lloyds and NatWest are UK focused. The biggest risk is the economic outlook in the UK.”
Arlene Ewing, associate director of Brewin Dolphin, said she would expect UK banks to up their provision for bad debts further, given the ongoing economic uncertainty. And she highlighted her view that banks will be extremely cautious towards lending in the current economic conditions. Ms Ewing said: “Who is going to lend to anybody in the hospitality sector? Who is going to lend to house buyers, and how is that going to play out across the housing sector?
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“Banks are already under pressure with margins. There is no growth. If they can’t get that margin back in, there is no growth for them.
“What do they then become? Large institutions that basically just use their holes in the wall? It is all a very different landscape.”
While the housing market was buoyant as the UK economy emerged from the first national lockdown in the summer, a reflection of “pent up demand”, Ms Ewing said the “tell-tale signs” will emerge soon. She noted: “Mortgages will play a huge part in that lending, obviously. Who are they going to lend to? How much are they going to lend? Is there going to be any mortgage available above 50 per cent loan to value? Probably not, I would suspect.”
Mulling the longer term outlook, Mr Hewson said the share prices of Lloyds and NatWest have “huge potential” to rebound after coming under huge pressure in 2020, as the vaccine is rolled out and restrictions ease, “particularly if they [banks] decide they can start to pay dividends again”.
He said the signing of a trade deal between the UK and the EU was “risk positive” for the banks, as it makes the Bank of England “much less likely” in his view to move into negative interest rates territory.
He believes the evidence from elsewhere in the world shows negative interest rates are not an effective policy intervention.
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“I just don’t think they are proven to work,” Mr Hewson said. “If they worked, then Japan and Europe would be booming, and so would Switzerland. They wipe out a bank’s ability to generate cash flow.
“The problem also is we don’t have a liquidity problem – we have a demand problem. And negative interest rates are not going to do anything to mitigate that. If you are worried about your job, you are not going to go out and spend money just because a central bank imposes negative rates on you. All you are going to do is pull the money out, and put it somewhere else.”
Mr Hewson added that negative interest rates would “blow a hole in pension liabilities”.
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