UK's big banks rebound while smaller rivals flounder

Britain’s biggest banks have regularly come under pressure in recent years, watching new entrants expand rapidly while they struggled to deal with multibillion-pound conduct charges, capital raises and restructuring programmes.

But the tables were turned this week, as the UK’s established lenders prospered while their smaller rivals ran into trouble.

An IT failure at TSB was the most high-profile problem of the week, but disappointing quarterly results from Santander’s UK business and concerns that Metro Bank would need to raise equity this year highlighted the broader difficulties facing the so-called “challenger” banks.

In contrast, Joseph Dickerson, analyst at Jefferies, said Lloyds Banking Group and Royal Bank of Scotland in particular were reaping the benefits of a long process of repairing their balance sheets: “Now that there’s a focus on fixing operational deficiencies and executing plans it’s starting to bear fruit, so this quarter you have a much cleaner picture of the operations at these businesses, and they are generating capital and profit.”

For TSB, a planned switch to a new IT system turned into a crisis after one initial problem snowballed when its systems proved unable to handle the volumes of customers trying to access their accounts online.

By Friday, half of customers were still unable to log in to their accounts on TSB’s website, and the bank — which had hoped to save more than £100m a year through its new IT platform — had committed to paying a big chunk of those savings back to customers to prevent an exodus of account holders.

In contrast, TSB’s former owner Lloyds this week illustrated the benefits of its own digital investments, with lower costs helping it to a 23 per cent jump in first-quarter profits. The company’s statutory return on tangible equity in the first quarter climbed to 12.3 per cent, above its cost of equity of between 9 and 10 per cent.

Lloyds’ net interest margin — a key measure of profitability — climbed from 2.8 per cent to 2.93 per cent. The bank did not make any changes to its full-year targets, but UBS analyst Jason Napier said the figures looked “sustainable”, and predicted further outperformance.

Lloyds’ bullishness on margins contrasts with most of its smaller rivals, which are being squeezed by increased competition and higher costs. Santander UK reported a 21 per cent drop in pre-tax profits, and said competition for new mortgages would push down its margins over the rest of the year.

Nationwide Building Society, Clydesdale and Yorkshire Bank and Virgin Money — which reports its first-quarter numbers next week — have warned that the price war in the mortgage market will put a dampener on lending growth.

Ross McEwan, chief executive of RBS, also noted the “very very competitive marketplace” for mortgages, but strong performance in the rest of the larger group helped to offset some of the pressure. The state-backed bank’s commercial lending arm avoided some of the big one-of hits from collapsed retail businesses that hurt other lenders, meaning its provisions for bad loans came in lower than analysts had expected.

Like Lloyds, RBS spent significantly less than in recent years on restructuring costs and legacy issues such as compensating customers for mis-sold Payment Protection Insurance.

Results were slightly less buoyant at Barclays’ UK division, which did have to set aside more money for PPI. But senior figures at all three banks were optimistic about being able to focus on improving their core businesses, with most legacy issues either addressed, besides an impending fine from US authorities at RBS.

In addition to public anger over the TSB outages, investor unrest was also focused away from the established banks. Instead, Metro Bank drew the ire of shareholders and advisers for controversial payments to the wife of its chairman, and a bumper pay package for the chief executive.

Metro avoided a significant shareholder revolt at its annual meeting on Tuesday, but any cheer from the event proved shortlived as investors were spooked by its first-quarter results the next morning. The company’s growing loan book diluted Metro’s common equity tier 1 ratio, a benchmark of balance sheet strength. Shares in the bank tumbled 7 per cent as analysts predicted the group would have to raise capital sooner than it had planned.

Still, the big banks were wary of taking too much enjoyment from the travails of their smaller rivals. Executives at several banks expressed concern that problems such as those afflicting TSB damaged customer faith in the entire sector.

“Big moves like TSB coming off Lloyds’ systems on to their own always create major vulnerabilities and you don’t do those things likely,” one of them said. “Our thoughts go out to the TSB team while they fight their way through this thing …banks are massively complex businesses, and it’s not good for the industry when someone is having this difficulty.”

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