The outlook for the British banking sector in the 2020s is stable, consistent with that of the global banking industry, although it is set to face a number of challenges, particularly nonfinancial risks, S&P Global Ratings said in a report.
The rating agency said Jan. 7 that banks' ratings have improved from the last few years and the outcome of the December 2019 general election "implies a more-certain political backdrop" for the industry. The agency added that the result of the Bank of England's recent stress test indicates that banks can survive a future economic slump.
However, nonfinancial risks could escalate and hamper on the sector, including the uncertainty surrounding the U.K.'s impending departure from the EU. The agency had previously said the U.K. will likely request that the Brexit transition period be extended beyond December. The country's bank tax system also appears ripe for review, the agency noted.
The sector could also be dogged by its exposure to Hong Kong, where political tension and public unrest has been persistent, according to the report. HSBC Holdings PLC and Standard Chartered PLC, two of the biggest London-headquartered banks, are highly exposed to Hong Kong.
As for incoming Bank of England Governor Andrew Bailey, who currently oversees the Financial Conduct Authority, the agency said he will have a clear insight into the U.K. banking system's prudential regulation and the opportunities and threats associated with leaving the EU.
S&P Global Ratings, meanwhile, warned that a recession in the U.K. is still possible over the next two years.