The global financial crisis has left the UK's banking sector with rather fewer constituents than was the case a year ago. Following Northern Rock's collapse in the autumn of 2007, Alliance & Leicester was bought by Spain's Banco Santander , while Bradford & Bingley's assets were effectively nationalised. Indeed, the first big banking event in 2009 will be the disappearance of another high-street lender as HBOS is effectively absorbed by Lloyds TSB later this month.
The five remaining players: HSBC, Barclays, Lloyds, Standard Chartered and Royal Bank of Scotland - can expect a though year ahead. Amidst a deepening recession, banks can expect their freshly-raised capital piles to be slowly depleted as bad debts accumulate and treasury book write-offs continue. Accordingly, and despite last autumn's government recapitalisation of the banks, it is looking increasingly likely that lenders may have to seek yet more capital as the year passes in order to shore-up creaking balance sheets. Royal Bank of Scotland is already in talks to sell its £2bn stake in Bank of China in an attempt to raise further funds.
Even the Governor of the Bank of England, Mervyn King, has raised the spectre of complete nationalisation of the banks should they fail to begin to lend effectively again. But being pressured by government to lend in the midst of a recession looks set to make a bad debt crisis even worse - further fuelling a need for more capital. Against that bleak backdrop only HSBC's capital resources look robust enough to possibly withstand the strain. It didn't need to take any government cash and reported a tier-one (regulatory) capital ratio of 8.9 per cent as at end-September - notably healthier than at its UK rivals. Even those other lenders that didn't accept government help - Barclays and Standard Chartered - could face further capital pressures.
Meanwhile, with banks still wary of lending to each other, a return to normal interbank conditions looks set to be a slow process - a recipe for pricey funding. Add that to falling interest rates, meaning that bank earnings struggle as borrowers pay less to borrow, and lenders can expect to see plenty of margin pressure in 2009.
Overall, 2009 looks like turning into a struggle for survival for the banks and it could be quite a while before investors might feel confident enough to take advantage of the depressed bank share prices. In the much longer-term though, Lloyds could well emerge as the sector's best bet. The government's decision to waive competition concerns over Lloyds' acquisition of HBOS has helped create a bank with a 29 per cent slice of the UK mortgage market and a 35 per cent slice of current accounts. In the UK at least, that level of dominance will leave rival high-street lenders hard pressed to compete.
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