The second-quarter results are unlikely to show any impact from the Brexit vote, but the outlooks are likely to mention it heavily. There are already reports that Royal Bank of Scotland and its Natwest subsidiary have warned business customers in the UK that they could face being charged to hold cash at the banks. That’s being seen as a warning to the Bank of England that there will be consequences to any reduction in the central bank’s base rate.
If, as expected, the BoE responds to any economic weakness following the Brexit vote with an interest rate reduction, then bank margins will be squeezed further. The bank rate has been at a record low of 0.5% since March 2009, but further rate cuts are on the cards in the wake of the UK’s decision to leave the EU.
It is unlikely that the BoE will join the European Central Bank and Bank of Japan in introducing negative interest rates. BoE Governor Mark Carney, for one, is known not to be a fan of negative rates and it isn’t clear whether the policies are working in the eurozone or Japan.
The UK banks are also facing a Brexit hit from the property market. They’re big lenders in the commercial property sector, which is under strain since the vote, while the likes of Lloyds Banking Group, RBS and Barclays will be potentially hit by lower mortgage lending as the residential market also slows.
All of this means further pressure on future growth prospects, and some of the banks are likely to respond by further cost-cutting. Lloyds, for example, is already in the process of cutting £1 billion from its cost base, and could announce a more aggressive programme. The UK government has already stalled its sale of its remaining 9% stake in Lloyds, and the bank is also expected to delay plans to hike dividends for its investors.