EY ITEM Club

Outlook for Financial Services Spring 2015

Forecast for Banking

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“Despite the rise in UK banks’ income and assets in 2014, lending to companies and households remained subdued. The picture looks brighter for 2015, but the jury is out on whether faster economic growth — underpinned by low energy prices and rising real incomes — will do enough to support the growth in bank revenues and margins that investors are hoping for.”
 
Omar Ali
Partner, UK Banking & Capital Markets
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EY - Omar Ali
Omar Ali
Partner,
UK Banking
& Capital
Markets

Despite the rise in UK banks’ income and assets in 2014, lending to companies and households remained subdued. The picture looks brighter for 2015, but the jury is out on whether faster economic growth — underpinned by low energy prices and rising real incomes — will do enough to support the growth in bank revenues and margins that investors are hoping for. ↓ [... more]

 

A permanent change

The contraction in real incomes since 2008 means that even rising consumption is unlikely to trigger anything more than a modest recovery in household borrowing. And, while business lending is predicted to grow for the first time in six years, the figures from 2014 show that both corporates and SMEs have not just dropped alternative forms of financing in favour of borrowing from the banks. With bond and equity issuance looking to keep trending up, it may be that the recent long– term bank lending drought permanently changed behaviour.

With demand remaining subdued in many traditional activities, banks will need to continue to invest in new, differentiated products and services to ensure growth. But they will also need to keep an eye on challengers. There’s definitely scope for more challenger brands and services, especially in particular pockets of the market, such as financial technology and peer–to–peer lending. We expect another 5 to 10 companies will make it over the line and into the market in 2015, which should make for a dynamic year as new players and old jostle for position.

Regulatory demands

Against this backdrop, the Competition and Markets Authority review of personal current accounts and SME banking services is a tough ask. And it won’t be made any easier by the moving pieces introduced by some of the major regulatory reforms. Both the introduction of the Senior Managers Regime and discussions with the regulator on ring-fencing plans have the potential to force rethinks about the shape of the industry this year.

Stability is still elusive

To truly focus on driving renewed growth and returns, the industry needs a return to a more stable and certain environment. But at the moment, thanks to uncertainty surrounding the Eurozone economy, the outcome of the UK General Election and a possible subsequent referendum on the UK’s EU membership, this scenario still looks some way off.

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Banking highlights:

The value of banks’ assets and loans stabilized in 2014 after three years of decline. The strength of the UK economy should see the sector’s performance continue to strengthen from 2015 onwards. But the economy will remain a long way from a credit boom.

  • Net mortgage lending continued to run at subdued levels in 2014, rising by only 2.2% on the 2013 level to £1.12t.
  • Consumer credit saw the fastest rate of growth in 2014 compared with other categories of household borrowing and is expected to rise at an average rate of just over 4% from 2015 to 2018.
  • 2014 was another year of decline for net business lending, continuing a trend that began in 2008.
  • The proportion of SMEs using only bank loans, bank overdrafts or credit cards declined from 29% to 20% between 2011 and the first half of 2014.