Bank & Non-Bank Lenders
Sector trends & challenges
Regulatory capital adequacy
Systemic responses to improve sector resilience have focussed on increasing regulatory capital buffers, improving transparency of asset quality and accelerating loan loss recognition under IFRS9. Low NIM and high NPL levels remain a drag-anchor to regulatory capital
Asset quality deterioration
Asset quality continues to attract high regulatory scrutiny. Asset quality deterioration is expected to accelerate across all credit classes as temporary economic support and enforcement moratoriums unwind. NPL sale activity is expected to increase.
NIM and cost pressure
In an ultra-low interest rate environment, net interest margins on conventional banking activity have been squeezed. Cost transformation programmes have been countered by rising regulatory and compliance costs (e.g. conduct, data protection and cyber protection).
Sector rating profile
Stress levels across the UK bank and non-bank lender sector remain subdued. Elevated stress levels are emerging across certain challenger banks and non-bank lenders where sub-scale operations, specialist lending products and increased reliance on wholesale funding can create regulatory capital and liquidity shortfalls. Across Europe, stress levels have generally been eased by government COVID-19 support programmes and temporary regulatory easing. As both unwind, eyes are firmly focused on whether evidence of a V-shaped recovery is emerging and whether the ending of loan moratoriums (and other support measures) sees borrowers returning to regular repayments or drives a deterioration in asset quality that could threaten capital adequacy.
Bank & Non-Bank Lenders
Post the Global Financial Crisis, international banks and regulators have worked hard to improve the financial resilience, competitiveness and public trust of the banking sector.
Initiatives to de-leverage balance sheets and improve regulatory capital buffers, address and contain legacy conduct issues (such as PPI), and redefine and de-risk business models are well progressed. Against a backdrop of ultra-low interest rates, retail banking and credit underwriting models have been digitally transformed.
The response by the banking sector to the COVID-19 crisis has been critical in supporting the wider economy. The rapid deployment of state guaranteed loans (such as the UK BBILs and CBILs schemes) has provided much-needed liquidity to businesses. The sector has also supported retail consumers through increased forbearance and providing extra assistance to vulnerable customers.
COVID-19 is expected to reset the clock on recently observed improvements in capital adequacy, asset quality and cost, with rising NPL levels and increased servicing burden thereon. The parallel implementation of IFRS9 and calendar provisioning requirements will further impact capital adequacy. Recognising the adverse impact of high NPL levels on the viability of systemically important banks, regulators are seeking to get on the front foot. Initiatives under consideration include the establishment of Asset Protection Schemes and Asset Management Companies to promote the sale and resolution of NPLs.
Looking beyond COVID-19, the sector faces a number of ongoing challenges:
IT upgrades. Particularly across the established clearing banks, IT infrastructure is in need of continued investment to meet the demands of online consumers, the threat from cyber attacks, and regulatory requirements.
Regulatory requirements. The regulatory environment continues to evolve, especially following the UK’s exit from the European Union. Banks, especially those operating across borders, will need to continue working proactively to meet regulatory deadlines.
Managing costs. Keeping a lid on costs will remain a core priority for the sector, especially as smaller challenger banks seek to target more profitable customers from established competitors.
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