The “biggest risk” for banks is national foreclosure – not Brexit.

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Via Scott Wright

The unpredictable economic outlook emerging from the recent national shutdown is THE biggest obstacle to growth for Britain’s major banks this year, rather than a lack of clarity as to whether financial services firms will be able to enter European Union (EU) markets after Brexit, a leading City analyst said.

Share prices declined sharply between Christmas and New Year at Royal Bank of Scotland, owner of the NatWest Group, and Lloyds Banking Group, in the middle of a sell-off that was suspected to have been exacerbated by continuing confusion about access to EU markets.

However, at CMC Markets in London, Michael Hewson, senior market analyst, pointed out that both NatWest and Lloyds have limited exposure to the continent.

The ongoing dampening of economic activity from the recent national freeze is the greatest challenge facing U.K.-focused banks, Mr. Hewson said. In February, he will study the annual results of NatWest’s and Lloyds for signs of more loan loss provisions, having previously satisfied himself that enough provisions have been made before the recent lockdown.

In expectation of a spike in bad debts due to the impact of the coronavirus, both NatWest and Lloyds have already set aside billions of pounds. NatWest said in October that it projected full-year 2020 write-downs to be at the lower end of the range of £ 3.5 billion to £ 4.5 billion. Lloyds expects charges to be between £ 4.5 billion and £ 5.5 billion for damages associated with Covid. The burden on companies and households will rise again now that another national freeze is in effect.

The notion of a connection between last week’s sell-off and the European access issue was described by Mr Hewson as “nonsense” he said. “The biggest risk is the extended freeze and [the prospect of]rising defaults. We will be watching to see if banks make additional provisions for non-performing loans. Right now, [defaults]are below the threshold.”

He added, “Lloyds and NatWest are focused on the UK. The biggest risk is the economic outlook in the U.K.”

Arlene Ewing, Brewin Dolphin’s associate director, said she wanted the UK to do so. In the face of continuing economic uncertainty, banks will continue to raise their bad debt provisions. And she stressed her opinion that, in the current economic conditions, banks would be highly wary about lending. “Ms. Ewing said, “Who will lend to someone in the hospitality industry? Who will lend to homebuyers, and how will the real estate industry as a whole be influenced by that?

Banks are now getting their margins squeezed. Growth isn’t there. There is no development for them if they can’t recoup the margin.

“What will become of them then? Big institutions that are basically just using their holes in the wall? It’s all a very different landscape.”

When the housing industry was buoyant, like the U.K. economy emerged from the first national lockdown in the summer, a reflection of “pent-up demand,” Ms. Ewing said the “telltale signs” will soon emerge. She noted, “Mortgages will obviously play a big role in lending. Who are they going to lend to? How much will they lend? Will there be a mortgage above 50 percent loan-to-value? Probably not, I would guess.”

In view of the longer-term outlook, Hewson said that Lloyds and NatWest share prices had “great potential” to recover after the vaccine was implemented and restrictions eased under tremendous pressure in 2020, “particularly if they [banks]decide to start paying dividends again.”

He said that the signing of a trade agreement between the United Kingdom and the EU was a “risk positive” for banks, as he claims that it makes the Bank of England “much less likely” to step into the territory of negative interest rates.

He believes the evidence from other countries around the world shows that negative interest rates are not an effective policy intervention.

I just don’t think they’ve been shown to work,” said Hewson. “Japan and Europe would be thriving if they worked, and so would Switzerland. They wreck the capacity of a bank to produce cash flow.

The problem is that we don’t have a problem with liquidity – we have a problem with demand. And negative interest rates won’t do much to alleviate that. If you’re worried about your job, you’re worried about it.

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