UK Banks show resilience to weaker operating conditions supports stable outlook

Moody’s outlook on the UK banking sector remains stable, as banks’ strong capital, improving profitability and robust liquidity will offset deteriorating asset quality and operating conditions, as heightened Brexit uncertainty slows economic growth

Moody’s stable outlook for the banking system of the United Kingdom (UK, Aa2 stable), unchanged from last year, reflects the view that the banks’ strong capital, improving profitability and robust liquidity will offset deteriorating operating conditions and asset quality.

» Operating conditions will deteriorate. Our base case remains that the UK and the European Union (EU, Aaa stable) will agree a transition period after the UK’s scheduled departure from the bloc in March 2019. However, heightened Brexit uncertainty will slow economic growth, while banks also face headwinds from still-low interest rates and increased competition, including from new entrants.

» Moderate deterioration in asset quality. Slower economic activity will likely lead to a moderate deterioration in asset quality. The UK banks’ asset quality is currently strong, as reflected in their low non-performing loans and below-trend cost of risk.

» Strong capitalisation. The UK banks’ strong solvency and high quality of capital will help absorb any unexpected losses. Leverage is moderate, and will continue to decrease due to balance sheet management and modest operating capital generation.

» Profitability will improve. For large UK banks, a decline in costs due to lower conduct and litigation expenses will offset revenue pressures from low interest rates, supporting their profitability. They will also benefit from modest decline in operating and restructuring costs, outweighing a moderate increase in credit costs from a low base.