It’s impossible to discuss the fortunes of the FTSE 100’s UK-focussed banks without mentioning Brexit and how this will affect their profit outlooks for the near-term and beyond.
Things are changing by the hour in Westminster. But as I type, the chances of an economically-ruinous no-deal withdrawal occurring on April 12 are growing. It’s a scenario that’s viewed with increasing fear on both sides of the English Channel.
Following the failure of his indicative votes idea to break the House of Commons stalemate in recent sessions, Tory backbencher Oliver Letwin has reportedly said that exiting the European bloc without a deal was “90% likely.” Theresa May’s pledge to meet the Labour hierarchy for talks on EU withdrawal since then has breathed some life into hopes of a deal, though the issue of realpolitik means the possibility of a breakthrough still looks fragile.
Britain’s banks are hurriedly preparing for a no-deal withdrawal, and RBS took steps in December to switch £13bn worth of assets to the Netherlands to reduce the impact of a disorderly exit. These vast sums perfectly illustrate the fears the sector has over what Brexit has in store.
The Footsie’s banks aren’t just a slave to the economic and political landscape in the UK though. The impact of Brexit now and in the future on Lloyds, RBS and Barclays may command the most media headlines right now, but the rise and rise of the challenger banks is also having a devastating effect upon these big-caps’ top lines.
To illustrate the point, latest data from UK Finance showed while gross residential mortgage lending rose 2.5% in February to £19.1bn, the number of approvals issued by the high street’s major banks dropped 2.2% year-on-year.
The situation is particularly grave for Lloyds given how important the mortgage market is to its own operations. In its full-year results, the Black Horse bank cited the impact of “ongoing mortgage pricing pressure” in hampering revenues growth in 2018, and announced its open mortgage book balance remained stagnant on an annual basis at £267bn.
This shows the intensive — and increasing — competition the big banks are facing in the mortgages arena, just one retail banking area in which the dominance of the traditional lenders is being undermined.
As well as the prospect of sinking revenues and spiking bad loans as 2019 progresses, these FTSE 100 firms also face a colossal jump in PPI-related financial penalties as the August 29 claims deadline approaches.
Fresh data from the Financial Conduct Authority revealed the crushing effect this is having on the banking sector, with payouts of £334m forked out in January versus £261.3m in the previous month. Given their uncertain profits pictures and, in the case of Barclays and RBS at least, their wafer-thin balance sheets, the prospect of mounting misconduct bills casts doubt on their ability to pay out big dividends this year and beyond too.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.