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By Scott Wright
THE outlook for the UK’s major banks is brighter than it was 12 months ago, when the UK entered into its second national lockdown.
But the fortunes of major high-street players such as NatWest Group, owner of Royal Bank of Scotland, and Bank of Scotland parent Lloyds Banking Group, will continue to be influenced by the economic fall-out from coronavirus, analysts say.
The share prices of NatWest and Lloyds steadily climbed throughout 2021 as it gradually became clear that the banks were positioned well to ride out the pandemic, with profits at both banks rising as hefty provisions made for bad debts arising from the health crisis were released.
The NatWest share price closed at 243.6p last night, compared with 167.3p a year ago, while Lloyds closed yesterday at 51.72p, up from 37.16p on January 6 last year.
Analysts contacted by The Herald say the outlook is more encouraging than it was 12 months ago, but warn that headwinds remain because of a host of challenges on the broader economic front.
Inflation has soared on the back of global supply chain disruption and labour shortages, and consumers are facing huge hikes in energy costs.
But while consumers worry about surging household bills, the rising inflation has resulted in some benefit for banks. The Monetary Policy Committee of the Bank of England responded to inflation concerns by voting in December to increase the base rate from its historic low of 0.1% to 0.25%, catching City watchers who had been expected there to be no change by surprise. The higher rate, while still low by historic standards, gives lenders greater capacity to make more money from products such as loans and mortgages. But it brings other effects too.
Expressing the view that inflation is the “biggest risk” to the UK economy at present, Michael Hewson, chief market analyst of CMC Markets, said: “Rising inflationary pressure, while good for bank margins, could well impact consumer borrowing patterns, particularly in mortgage lending which has been quite strong, even as credit card spending has been subdued.
“Central banks will remain under pressure to contain the prospect of rate rises next year despite rising inflation expectations.
“The broader economic recovery is already showing signs of slowing as winter approaches with consumers facing higher food and energy costs, not only in the UK, but in the US and Europe as well. How transitory these are and consumers’ ability to absorb them will dictate whether we can see the banks maintain their current positive momentum, improve their profit margins and continue to pay decent dividends.”
Zoe Gillespie, investment manager at Brewin Dolphin in Glasgow, said the outlook for interest rates at the start of 2022 remains uncertain, given that the impact of the Omicron variant still remains hard to gauge. Prime Minister Boris Johnson insisted this week that the UK economy would not be shut down again as it was before because of coronavirus, but there were signs that the economic recovery was running out of steam before Christmas. Inflation will continue to put businesses and households under pressure for months to come, with the Bank of England expecting it to peak at around 6% in April.
Ms Gillespie said the effects of the Omicron variant will play out in the first quarter, but does not think “going forward that they (banks) will have to make provisions” for loans going bad because of factors related to coronavirus this year, as previously occurred.
But she said the trend of recent years for the major banks to shut branches will continue, pointing to statistics that show branch numbers declined by 40%, from 11,255 to 6,965, over the decade to 2021.
Noting that branch cuts are an “easy way for banks to reduce costs”, Ms Gillespie said the “direction of travel will continue” in terms of closures, adding that the current policy brought difficulties for older people and customers in rural areas.
Meanwhile, Ms Gillespie suggested that NatWest continues to be constrained by the fact it continues to be majority-owned by UK taxpayers. The bank remains 54.8% owned by taxpayers, a legacy of its £45.5 billion bailout by the UK Government during the financial crisis of 2008 and 2009.
She told The Herald: “Until they are in control of their own destiny, and conditions improve, it is difficult to see what is materially going to change. I’m not sure 2022 is going to be that year. It is going to be interesting to see when it does turn. I think a lot will depend on when interest rates start to go up – that will be the big thing.”
In recent years, NatWest has gradually reduced the scale of its operations. Last year it began withdrawing its Ulster Bank business from the Republic of Ireland, and sold the Adam & Co brand as part of a deal that saw it offload Adam’s investment management business to Canaccord Genuity Group.
However the bank saw the past come back to haunt it again. In November, it was fined £264.8m for breaches of money laundering regulations relating to a UK customer in the period between 2012 and 2016.
Asked if the shrinking of NatWest was denying the bank margin-earning opportunities, Mr Hewson replied: “Not really, no, because the margin opportunities at NatWest are fairly low anyway, and that is something they need to address. In terms of banking model, NatWest is fairly similar to Lloyds. The only problem it has got is it needs to find out where its weakest links are when it comes to its margins.”
Mr Hewson said: “For me, NatWest is slowly turning itself around, [although it is] still dealing with legacy issues. But as long as they continue to do that then I see no reason why we can’t see pick-up into 2022.”
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