U.K. Banks: Fundamentals Help Offset Nagging Pressures

In an updated report on the United Kingdom banking system, Standard & Poor’s said that the system remains among the strongest worldwide. ‘Profitability is underpinned by the diversity of revenues, a culture of rigorous cost control, and continued relatively benign loan-loss provisions,’ said credit analyst Nigel Greenwood. Net interest margins remain reasonably attractive, although in most market segments they continue to moderate downward. U.K. banks have worked hard to improve the proportion of profits generated from noninterest income sources, but meaningful and sustainable overall revenue growth is an industry challenge, according to the ratings agency, adding that the flexibility to control overall staff costs helps to underpin efficiency advantages compared with international peers. Innovative improvements to manufacturing and distribution costs are also important drivers of ongoing profitability. ‘Improved data management and a good culture of risk oversight are helping to control asset quality, but loan-loss provisions can be expected to rise,’ Greenwood explained. Despite a weaker economic environment and rises in personal taxation, the U.K. household sector remains reasonably resilient, the report stated.

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