EY ITEM Club
Outlook for financial services Summer 2015
Forecast for Banking & Capital Markets
“With opportunities for revenue growth still challenging across the industry, innovation will be key”
Partner, UK Banking & Capital Markets
Read Omar’s full banking viewpoint
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]
Banks are feeling the pressure
While the UK economy is gradually picking up, banking performance has lagged behind the broader upturn. Questions remain over the ability of banks to meaningfully grow revenues and how the current shifts in the competitive environment will affect both incumbent and challenger banks.
Pick-up in lending doesn’t mean all is well
As our forecast highlights, bank lending remains disappointing on both the business and consumer fronts. That said, we are now approaching the point in the cycle where we should start to see a switch from deleveraging to borrowing.
Despite strong rises in real income, households still remain relatively unwilling to borrow. A key indicator is equity release, which remains at an all-time low based on recent data from the Bank of England. This underlines the extent to which consumers are still paying down their debt and mortgages rather than taking out equity.
A further note of caution is sounded by the banks’ aggregate provisions against fines for regulatory breaches. These are little changed from their levels in 2013. While there are constant hopes from banks that the fines are tapering off, the provisions suggest that there are almost certainly more to come.
Summer Budget signals further squeeze
At the same time, a number of factors are combining to change the competitive environment between the large banks and the challengers. In his Summer Budget, the Chancellor announced a reduction in the bank levy but introduced a new corporation tax surcharge on UK bank profits.
The reduction of the bank levy is a welcome step by the Government towards ensuring the UK remains a competitive place to do business. However, the timing between the introduction of the surcharge and the end of the bank levy is significant, with the larger banks likely to feel the squeeze through to 2021.
While the levy was funded disproportionately by the bigger banks, this new tax surcharge applies to all UK profits. The outcome could be that the competitive edge challengers have enjoyed to date is removed.
Other factors may play in favour of the new entrants. With the 2019 deadline for ringfencing of investment banking operations now looming, and the new Bank of England stress tests due this year, some of the larger players are set to face a fresh wave of regulatory driven costs that will be felt less keenly by the new entrants.
Finally, with opportunities for revenue growth still challenging across the industry, innovation will be key. With this goal in mind, most are investing heavily in digital, FinTech and mobile technology. Questions remain around how banks can ensure that this investment succeeds in winning a greater share of their customers’ overall spending and reducing the cost base.
Read the full Summer 2015 forecast 1.1Mb, August 2015×
While lending is picking up, banks are having to factor in the possibility of further fines for regulatory breaches, and the tax announcement in the Summer Budget, which will squeeze them further.
- Bank lending to companies is likely to move into positive territory for the first time since 2008. Gross lending to firms increased by 19% in the first half of 2015 compared to a year earlier.
- We expect mortgage lending to grow at an annual rate of 3.8% from 2015-2019 as house prices continue to rise. Growth will be limited by tighter regulatory constraints and continued high levels of cash transactions.
- UK banks incurred fines and redress of £7.7b in 2014, up from only £0.5b in 2010. Despite constant hopes from banks that fines are tapering off, provisions suggest there are almost certainly more to come.
- Growth in consumer credit has returned to pre-financial crisis rates. A strong rise in real incomes will help consumer credit grow by almost 5% per year from 2015-2019
- The timing overlap between the introduction of the 8% tax surcharge and reduction of the bank levy is significant, increasing the tax take from the UK banking sector between now and 2021.