The Bank of England's Credit Conditions Survey for 2013's final quarter, published this month, revealed that momentum is building behind a recovery in credit demand. As improving credit conditions have historically boosted the banks, does this finally signal a sustained recovery for the big UK-focused lenders - RBS (RBS), Lloyds (LLOY) and Barclays (BARC)?
The report certainly contained good news. Mortgage demand "increased significantly", following robust third-quarter demand. Unsecured lending bounded ahead, too, while credit demand from medium-sized businesses also rose strongly. Lenders are also meeting this demand. In commenting on the report, the BBA's chief economist Richard Woolhouse remarked that they're "playing their part in the recovery as economic indicators continue to surprise on the upside in 2014". Defaults, too, are falling, especially on mortgages and small business loans, which should eventually allow for provision write-backs. Taken together, this should support an earnings recovery.
The improving sentiment could also provide a fillip to bank reprivatisation, which began in September when the government sold, through a placing, a 6 per cent stake in Lloyds. It's widely expected that the next disposal of Lloyds' shares will take place early this year and may include a retail investor offering alongside a further institutional placing. At the time, Investec banking analyst Ian Gordon even felt that "it [the government] could be out in full by the election".
But reprivatising RBS won't be so easy - its shares, at 365p, remain well below the government's average 502p buy-in price. While, in June, regulators identified a £13.8bn capital shortfall at RBS - that gap should close, but it's hardly an ideal backdrop for re-privatisation. Moreover, a government report in November noted that, for many of RBS's businesses "returns, even excluding the non-core run-down division, are below both RBS's cost of equity and the returns generated by the majority of comparable European banks". A few quarters of better credit conditions aren't likely to significantly change that.
Then there's the earnings threat from business misconduct compensation. The worst may be over for PPI claims, but provisions here are still rising and interest rate hedging (IRH) mis-selling could deliver the next big hit. "Average [IRH] redress costs continue to rise, and we suspect that the entire industry has more to come," believes Mr Gordon. He also see RBS as materially underprovided for here - it has three times as many IRH cases as Barclays, yet its provision is just half as much. Moreover, nether Lloyds or RBS have yet returned to the dividend list.
Other institution-specific issues could continue to provide a drag, too. For instance, Barclays is heavily reliant on volatile investment banking - its profits here slumped 12 per cent in the nine months to end-September. While legacy issues, such as painful credit quality problems in Ireland at RBS and Lloyds, will also take time to resolve.
