Tuesday, December 03, 2019 / 12:58 PM / by
Moody's Investors Service / Header Image Credit: Competition Policy International
The outlook for the UK banking system has changed to negative from stable, as a deteriorating operating environment weighs on banks' asset quality and profitability, and low interest rates and increased competition in mortgages reduce net interest margins of most UK lenders, Moody's Investors Service said today in a report on the industry published annually.
"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. "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."
Problem loans will increase moderately amid weaker economic growth and higher unemployment. Even so, banks' capital will remain broadly stable as they will likely counterbalance lower organic capital generation by reducing their shareholder distributions. Issuance of loss absorbing debt to comply with EU rules will create an additional buffer to protect depositors and senior bondholders.
Moody's expects a modest deterioration in profitability, as persistently low interest rates and tough competition in the mortgage market erode banks' margins. In addition, banks will continue to reinvest cost savings achieved in enhancement of IT platforms and digitalisation of processes and channels. Some large lenders, however, 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).