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No-deal Brexit not a factor in ratings agency calculations for U.K. banks

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No-deal Brexit not a factor in ratings agency calculations for U.K. banks

Analysts at S&P Global Ratings have not considered the impact of a no-deal Brexit on U.K. banks in their most recent base-case economic forecast because there is no majority in parliament for such a course.

Although the analysts warn about the implications of a "disorderly Brexit," they wrote in a Jan. 10 note that their broadly stable view of the U.K. banking system is predicated on the U.K. leaving the European Union in an orderly fashion.

S&P Global Ratings’ analyst Osman Sattar said there are reasons to suppose that a no-deal Brexit is unlikely.

"There is no majority for a no-deal Brexit in parliament and we are drawing some comfort from that. There's no majority for any other course, either. But both sides, the U.K. and the EU, are also still talking to each other. And the EU has said it will do what it can to help the U.K. government get the deal passed," he told S&P Global Market Intelligence.

Parliament set to vote

The House of Commons is scheduled to vote on the government's proposed withdrawal agreement on Jan. 15, though a previously scheduled vote on the issue before Christmas was withdrawn. The government is facing considerable opposition to the withdrawal agreement and is expected to lose the vote. However, it could then return to parliament with amendments to the agreement in a renewed attempt to get the bill passed. British parliamentarians have also proposed legislation, which would kick in in the event the government cannot pass a bill, to ensure that the U.K. cannot exit the EU without a deal.

"We view U.K. banks' balance sheets as solid and their operating earnings as modestly improving," the S&P Global Ratings note said. "These provide a substantial cushion to withstand potential turbulence from political and economic events. We expect their capital levels to remain broadly at current levels, as most banks appear likely to increase dividends and buybacks in 2019."

No-deal warning

S&P Global Ratings did note that a no-deal Brexit and the subsequent damaging hit to the banks could change things. It said a "disorderly Brexit, and subsequent detrimental effects on the banking system, could result in ratings actions on U.K. banks." It also said it could revise its outlooks or ratings on U.K. banks if it saw a no-deal Brexit as increasingly likely.

"A no-deal Brexit could result in severe macroeconomic weakness, which would lead to rising personal and corporate U.K. insolvencies and weaker collateral values. In time, this would likely play through to banks' asset quality and activity, undermining earnings and, possibly, capitalization to a modest degree," said the note.

The ratings agency works on the basis that when it changes the outlook for a credit institution there is a one in three chance that the rating will change over the next two years.

Moody’s, in a note on financial institutions published on Dec. 21,2018, said planning for a no-deal Brexit by the U.K. and the EU had mitigated some of the risks to banks and clearing houses. Fitch in October last year described U.K. banks as "well-positioned" from a funding and liquidity perspective to cope with a no-deal Brexit.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.