FTSE 350: Banks still squeezed

With new leadership come new promises and new ideas for improvement. But as investors scan the finance landscape for 2020, there’s little to suggest that this collective change of the guard mirrors a shift in circumstances for the largest UK banks. If anything, the backdrop is set to remain just as tough.

For one, sentiment – both the shareholder variety and the preparedness of businesses, consumers and homeowners to borrow – will inevitably move to the beat of the UK’s Brexit negotiations with the European Union. Judging by the tone of European Commission president Ursula von der Leyen – and all other evidence to date – those negotiations are going to be tough. And having ruled out an extension to the Brexit transition period, a freshly-minted government has set up yet another cliff-edge at the end of this year. Given bank stocks have proved most sensitive to the myriad crises and occasional breakthroughs since the referendum, 2020 will almost certainly prove volatile for sector ratings and prices.

Then there is monetary policy, which is unlikely to provide much relief. If anything, gilt prices, the swap market and the words of outgoing Bank of England governor Mark Carney all point towards an interest rate cut. This is normally bad for banks, as it squeezes net interest margins – the difference between income earned from lending and income paid out to deposit-holders and other creditors.

That’s all the harder when rates on both savings accounts and mortgages – where most UK lending is directed – are already low. The latter market is especially competitive. Since rules were brought in last year to ring-fence lenders’ domestic retail businesses from their international and investment banking, certain banks – most notably HSBC and Barclays (BARC) – have effectively been forced to redirect their chunky deposit bases towards secured personal lending, which is dominated by residential mortgages. Barring a strategic shift, this dynamic is not about to disappear.

Another big theme for 2020 will be banks’ progress with their digital offerings. It is probably too soon to expect these major investments to be reflected in lenders’ cost-efficiency metrics, although this year will see several important test cases in the ongoing push to meet customers’ needs and stay ahead of the fintechs. These include Lloyds’ plans to launch a mass-market robo-advice offering, and RBS’s launch of its Bó banking app – which represents the listed sector’s most concerted (and arguably blatant) effort to challenge the viral-like spread of digital-only banks such as Monzo. On the face of it, Virgin Money’s (VMUK) recent investment in a “digital disruption hub” in its former Newcastle headquarters – ostensibly to improve the user experience and “deliver customer proposition improvements” – is less inspiring.

At least investors can strike those three dreaded letters – PPI – from their laundry list of concerns. Following last summer’s deadline for payment protection insurance claims, the major high-street banks’ quarterly earnings reports should be free of surprise provisions for redress. Indeed, from a conduct perspective, things have not looked so rosy for the major lenders since the financial crisis. Which probably means another scandal is due.