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Nearly a decade after the crisis, UK banks struggle on


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Nearly a decade after the crisis, UK banks struggle on

Nearlya decade after the onset of the financial crisis and despite a long period ofreasonable growth, the U.K.'s four leading banks continue to struggle withdeclining lending, pressured margins and weak returns, as demonstrated by datafrom SNL Financial.

TheBritish banks are by no means alone. HSBC Holdings Plc CEO Stuart Gulliver "market conditionschallenged the entire banking industry" in the first quarter. Volatilityhit both wholesale banking and wealth management, he said, observing thatglobal trade also was slowing.

AlthoughHSBC claimed to be taking market share from competitors, CFO Iain Mackay notedthat it faced "a pretty difficult challenge" to reach its 10% ROEtarget in 2017 and that further work on costs was required as well as apossible rise in U.S. interest rates.

Inthe meantime, as one analyst observed on the results call, the market isconcerned about HSBC's ability to maintain its barely covered dividend. It isnot alone in this respect — Barclays Plc has cut its dividend while hasonce again delayedrestarting payouts because of the struggle to divest Williams &Glyn.

Thistechnically complex process has been going on "for seven years andcounting," Investec's Ian Gordon remarked in an interview, and managementappeared unable to say when it might be concluded. It costs some £50 millionper month.

Deleveragingfeatures strongly at BarclaysPlc as well as at RBS, distorting earnings considerably. AtLloyds Banking GroupPlc, year-over-yearcomparisons were skewed by the prior-year disposal of .

InLloyds' ongoing business, meanwhile, net loans and advances were "broadlyflat in 2016" as the bank strove to protect margins even at the expense oflosing market share. Returns on average and risk-weighted assets were weak,however, while its cost-to-income ratio was high for a domestic lender.

Lloydshas avoided hurting its net interest margin by bringing down its front bookspread. CFO George Culmer reiterated a 2016 NIM target of 2.7%, and Jefferiesbank analyst Joseph Dickerson suggested that it could rise further as expensivecrisis and other funding rolls off and is replaced. Lloyds is also looking toreplace some retail with corporate deposits.

However,said Gordon, "Excluding Lloyds, there was margin erosion across theboard," noting that Barclays beat expectations because of a "less badthan expected" performance in investment banking but that the performancein the U.K. business "was pretty dire in terms of volumes and margin."

Althoughreturns remained "decent" in the Barclaycard and U.K. corporate andretail businesses, Gordon said, the dividend remained uncovered, and progresstoward a double-digit return would come, if at all, through the disappearanceof exceptional charges.

Dickersonsaid the U.K. banks are still paying the price for their actions during andimmediately after the financial crisis.

"Thereality is that the banks did not repair themselves fully in 2009 and thenthere was a protracted downturn in Ireland, which impeded repair at Lloyds andRBS," he told S&P Global Market Intelligence. Household deleveraginghas held back demand for loans, he added, and although low rates have helpedcredit conditions, the pace of deleveraging is inimical to growth.

"RBShas every year been shedding the balance sheet equivalent of . You cannot haveany growth in the banking system with that sort of deleveraging," heobserved.

Andhaving failed to produce significant growth in benign conditions, the U.K.banks may now face circumstances that are more difficult.

Citianalysts predicted in late April that net interest margins would begin todecline in 2017 as the churn of standard variable rate mortgages increases.Meanwhile, Bernstein analyst Chirantan Barua emphasized that banking is acyclical business and expressed fears that the cycle is turning after six yearsin both the U.K. and the U.S.

Theperiod saw unemployment decline and house prices rise in the U.K., but here andelsewhere around the globe, a property bubble has been created, he warned.

"Themacro bull market is coming to an end," Barua said. "The capitalbuild, which has happened during the last five years is finishing, which ispositive, yet by the time that starts to kick in, the earnings will disappear.Six years is too long [for a bull market] and it has been propped up by centralbanks. We are in for a massive correction in earnings."

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