EY ITEM Club

Outlook for financial services
Winter 2015-16

Banking & Capital Markets forecast

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“The current environment is exhibiting several positive signs for both the UK banking industry and the economy generally. However, it also carries an array of downside risks, both immediate and longer term. They range from the slowdown in China and other emerging markets to the uncertainty arising from the possibility of Brexit.”
 
Robert Cubbage
Partner, UK Banking & Capital Markets Leader
Read Robert’s full banking viewpoint

Welcome


EY - Robert Cubbage
Robert Cubbage
Partner,
UK Banking
& Capital
Markets Leader

The current environment is exhibiting several positive signs for both the UK banking industry and the economy generally. However, it also carries an array of downside risks, both immediate and longer term. They range from the slowdown in China and other emerging markets to the uncertainty arising from the possibility of Brexit. ↓ [... more]

Banks should feel optimistic …

Since our last financial services forecast in the summer of 2015, it’s undeniable that the bright spots for UK banks are more visible. The positives for the sector range widely across the regulatory, commercial and economic landscape – with the UK’s banks having passed the latest stress tests based on the considerable strengthening of their capital positions.

As the forecasts from the EY ITEM Club underline, the causes for optimism are now being strengthened by a pickup in lending both to businesses and consumers. While references to pre-crisis growth rates are always a little unnerving, it is encouraging to see net rises in mortgage lending and consumer credit returning to the levels seen in 2006-07. Also, net lending to companies turned positive in the latter part of 2015 after more than six years of decline. The industry is increasingly looking to move forward, though past misconduct issues continue to affect them financially.

On the regulatory front, banks can draw further encouragement from the less strident tone being taken by the authorities. This shift has been most notable around requirements such as ring fencing and directors’ liabilities, and in the dropping of the FCA’s planned review of banks’ conduct and culture.

… however, risks still remain

While the regulatory rhetoric may sound more conciliatory, there’s still plenty to do to meet the obligations of MiFID and SMR, for example. Ring fencing will also have a significant impact on banks’ governance and operations with the related implementation and compliance costs, and execution risks.

The top-line risks are not difficult to spot, from the apparently relentless plunge in the oil price, to the challenges in China, and from the recent slide in sterling against the dollar to the rumbling geopolitical instability in the Middle East. While stronger capital bases and closer Bank of England monitoring should prevent rising household borrowing from triggering renewed instability, the industry will need to keep the lessons of 2008 in mind.

Even if the biggest risks do not crystallise, banks will still need to navigate through this shifting environment – with profitability still under pressure and with low interest rates set to continue throughout this year and beyond. The prospect of the forthcoming referendum on EU membership and potential for Brexit are also casting uncertainty over both short- and long-term investment plans for banks and businesses in the wider economy.

Overall, banks have several reasons to be cheerful at the moment. But there are probably just as many reasons to be watchful.

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Download Read the full Winter 2015-16 forecast 881K, February 2016

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Banking highlights:

Banks can draw encouragement from strong consumer confidence and a less strident tone being taken by authorities – but past misconduct issues will continue to affect them financially.

  • Bank assets are forecast to finally reach their 2008 peak of £7.3t by 2019.
  • Driven in part by car registrations reaching a record high, consumer credit rose by 6.6% in 2015. This should ease to 5.7% in 2016.
  • Household lending is predicted to increase by 3.4% this year as house prices continue to rise.
  • Banks declared a further £1.5b of provisions relating to past misconduct in their 2015 Q3 results. Misconduct costs are likely to remain high in the near future.