In a recently published report, S&P Global Ratings said it sees political risk and international investor sentiment toward the UK as the key risks facing UK banks in 2018 (see UK Banks: What’s On The Cards For 2018). This isn’t new–the UK banking system has operated against a constant backdrop of elevated political risk since 2014 and during that period, they have made good progress toward improving their balance sheets. Achieving stronger returns on equity has proved more elusive, however.
As the Brexit talks rumble on, we expect them and the related parliamentary processes to dominate the newswires. The UK’s minority government increases political risk, especially as the UK is unused to operating with a minority government. Our sovereign rating on the UK has a negative outlook and our economists forecast relatively low GDP growth of 1.0% in 2018. Nevertheless, we anticipate that economic and industry trends will be stable for the UK banking sector.
We see some possibility of unsupported group credit profiles (UGCPs) being revised upward in 2018, if balance sheet strength further improves and earnings prospects accelerate, but it is hard to imagine wholesale sector upgrades, given the political backdrop. Unless the political and economic environment deteriorates more sharply than expected, or banking groups experience management mishaps, we consider the likelihood of lower UGCPs to be limited.
Uncertainties related to Brexit negotiations, specifically regarding transitional arrangements, are likely to weigh on business confidence, while inflation is set to outpace pay growth for most of 2018. We forecast that the economy will grow more slowly in 2018 than in 2017 as these factors weigh on business investment and private consumption. In our baseline forecast, we expect that economic growth will moderately accelerate in 2019 and 2020 while the UK transitions to its new relationship with the EU in 2021.
Only a rating committee may determine a rating action and this report does not constitute a rating action.
(Source: S&P Global)