RPT-Fitch: Capital likely to be focus for major UK banks in 2014
Dec 5 (Reuters) - (The following statement was released by the rating agency)
Strengthening capital, sound liquidity and stable funding underpin the stable sector outlook for UK banks, although they are likely to boost capital further in 2014 to satisfy higher regulatory and market expectations, Fitch Ratings says. Overall profitability is likely to stay low, albeit varying by bank, with the risk of further conduct costs.
UK banks reported greatly improved fully loaded Basel III ratios at end-September, between 9.1% and 11.6% (the figure includes Barclays' rights issue of October 2013) and are at a good starting point to meet additional rules. However, we expect an increased focus on leverage, which remains relatively weak for several large UK financial institutions. Estimated Basel 3 leverage ratios were between 2.3% and 4.6% at end-September 2013. Most banks have tended to switch to low-risk assets rather than reduce overall balance-sheet size to boost risk-weighted capital ratios. Progress in this respect has also been made in the mutual sector following the launch of Nationwide's new loss-absorbing core Tier 1 capital instrument, core capital deferred shares.
Overall, however, despite improving slightly, we expect internal capital generation to remain low in 2014 as profitability is likely to remain hampered by weak revenue. Loan impairment charges as a percentage of loans are likely to stabilise or even fall slightly at most banks in 2014, boosting operating profitability, but the risk of additional large conduct and legal costs remains high for several major UK banks.
There may be a further modest rise in the stock of non-performing loans, but UK residential mortgage loans are performing well thanks to low base rates, and most problematic legacy SME and corporate loans have now been impaired and covered with impairment allowances. Asset quality is supported by recent rises in house prices, stable unemployment and slightly lower, albeit still high, household indebtedness. Legacy commercial real estate may continue to pose a threat and impinge on both profitability and asset performance in 2014, although the main factor likely to result in higher impaired loans would be a rise in base rates.
For more details on our expectations for UK banks in the coming year, see "2014 Outlook: Major UK Banks", published today at www.fitchratings.com.
Link to Fitch Ratings' Report: 2014 Outlook: Major UK Banks
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