Martin Flanagan: Why big banks have little to fear

The UK economy has been chugging along decently for the past few years, so bad debts are down and the case for lending advantageous. Picture: Ian Rutherford

It is likely that the picture over the past few years will be repeated. A sound underlying financial performance, but scarred in terms of headline numbers by legacy issues, or “bumps in the road” as Royal Bank of Scotland chief Ross McEwan has called them.

RBS itself flagged as much last month, when it said it would set £2.5 billion aside for 2015 to cover past wrongdoing. It means RBS will this Friday record an annual loss for the eighth year running.

The major financial hits tarnishing the banks’ headline earnings since the crash have certainly covered the waterfront. Rigging of the rate at which banks lend to each other, money laundering for drug barons, currency market manipulation, PPI, mis-selling of complex hedging products to small businesses…

Sub-prime mortgages and related esoteric financial packages continue to cast a long shadow, with banks still shuddering at the words US Department of Justice. Banquo’s ghost will be hovering for some time yet.

However, excluding such lingering hangovers that cause losses and dented profits, the underlying banking canvas is quite smooth.

The UK economy has been chugging along decently for the past few years, so bad debts are down and the case for lending advantageous. The likes of Lloyds, Barclays and HSBC have been either edging up or holding their net interest margins – the bedrock of banking in many ways, where lenders seek to charge more interest on their loans than they pay out on customers’ savings.

In this they have been helped by Bank of England interest rates at historical lows for seven years now. At the behest of regulators, UK bank balance sheets are much more robust than they were in the days Lehman Bros was toppling over and the likes of RBS, UBS and Citigate were being bailed out by governments.

The UK mortgage market is robust. And retrenched investment banking operations, even though still subject to lumpier earnings than high street banking, look sleeker and more focused than they have for a decade.

It says it all that the Bank of England recently indicated that it was relaxed at any ramping up of dividend policy at the banks because their capital cushions are far healthier now.

Despite the macro-economic headwinds from China and the emerging markets, and the shadow of Brexit, the big five UK lenders have little reason to fear their incremental underlying earnings recovery may hit the buffers.

Challenger banks such as Virgin Money, Clydesdale, TSB, Aldermore and Hampden & Co may be nipping at their heels, but so far it is a case of small victories rather than meaningful market share gains.

Next week should reinforce the feeling that, twists in the tarmac aside, the big banks aren’t doing badly. «