As we draw into the final months of yet another exciting year for UK banks, it’s time to take stock of another quarter of earnings. While the sheer exhilaration of 2016’s summer was always going to be hard to match, 2017 has still thrown up its fair share of drivers for the lifeblood of the UK economy.
Over the next two weeks, the four largest Banks in the UK – Barclays, HSBC, Lloyds and the Royal Bank of Scotland – report their Q3 figures to investors.
This report will provide a guide of what to expect, as well as looking at the key events that will impact these financial giants as 2017 draws to an end.
Central Banks Driving Sentiment
Over the past month, central banks have stolen back the spotlight from politicians and, in doing so, the banking sector has become one to watch once more.
Having lagged well behind their American counterparts, European central bankers have finally shown their hawkish colours. The European Central Bank (ECB) is set to announce the long-awaited tapering of its quantitative easing scheme before the end of the year, while the Bank of England is expected to raise interest rates for the first time since 2007 as early as November. All the while, the US Federal Reserve continues to hike interest rates and began trimming its bloated balance sheet in October.
The possibility of removing accommodative policy is bullish for banks, with rising interest rates improving margins while reducing bond purchases could increase much-needed volatility in asset classes.
But after years of reliance on cheap money, can European central banks finally ween markets from it?
Brexit Negotiations
2019 feels a long way over the horizon, 2021 even more so, however British banks are already preparing for these key dates in the Brexit calendar. These are the current dates for the end of Brexit negotiations and the proposed transitional period – 18 months and 42 months away respectively – yet they will have a significant impact on UK banks.
Currently, the UK has full access to the European customs market, allowing banks to trade European instruments and to operate in EU countries. However, this access would end upon reaching these dates. With no transitional deal, March 2019 would mark the cut-off point for this right, while a 2-year transitional period would allow access until 2021.
As negotiations continue, access to Europe for the UK’s financial sector will likely become a hotly contested issue. Will the UK make concessions in order to retain access to the key European market?
Will volatility ever return to markets?
A major factor that weighed on banks’ second quarter earnings was the lack of volatility in global financial markets. Banks, using their dominant position in the marketplace to gather greater information than the regular investor, rely on sharp movement in asset prices to turn impressive profits.
However, with central banks turning increasingly hawkish, and the ever-present prospect of a European or US political catalyst for a sharp move, have banks weathered the period of low volatility?
Keep reading to find out which of the UK Banks performed the strongest after Summer’s Q2 results.
