British banks warn of ‘false period of calm’ ahead of Brexit negotiations

Britain’s major banks are set to report stronger-than-expected results this week, confounding expectations that political and economic upheaval caused by the country’s vote to quit the EU would immediately squeeze profits.
British banks warn of ‘false period of calm’ ahead of Brexit negotiations

Since the vote in June, shares in Royal Bank of Scotland and Lloyds have fallen by about a quarter, partly reflecting their heavy exposure to any downturn in the British economy.

But senior executives from the major banks told Reuters that consumer spending had held up in the third quarter, while there had only been a modest drop in demand for mortgages and business loans — traditionally banks’ big revenue earners.

The executives also said that economic conditions would probably get much tougher next year when Britain is due to formally start the process to leave the EU no later than March, which will kick off two years of exit negotiations.

“This is a period of calm, maybe a false period of calm, before the storm,” a senior executive of one of Britain’s largest banks said. “But don’t be fooled by it.”

Next week’s results will be the first to capture fully the post-referendum landscape for banks, which initially threatened to be a testing one in terms of the economic climate and where lower interest rates would make it harder for them to make money and continue to pay dividends.

But British consumer confidence, the labour market and overall output have withstood the initial impact of Brexit better than most forecasts before the referendum.

Lloyds Banking Group will report results on Wednesday, followed by Barclays on Thursday and Royal Bank of Scotland on Friday.

Standard Chartered will report the following week and HSBC the week after. Analyst projections are for banks to report income little changed from the same period a year ago.

Barclays is expected to report third-quarter profit before tax of £1.3bn (€1.46bn); down only slightly from £1.4bn a year ago.

The banks’ earnings will likely be dented by a series of one-off hits, as they increase provisions to compensate customers mis-sold payment protection insurance (PPI) and top up pension pots hit by falling bond yields.

RBS is expected to report a loss of £231m partly because of ongoing restructuring and litigation charges, according to analysts. Lloyds is expected to contribute an additional £750m in PPI provisions.

Britain’s transport minister Chris Grayling yesterday said Britain will have tariff-free trade with the EU after it leaves the bloc as it is in both sides interests to do so.

Asked whether the EU’s floundering free trade deal with Canada was a worry for Britain, Mr Grayling, a leading campaigner for Brexit, said Britain’s relationship with the EU was different as it was the bloc’s most important export market.

“Nobody in continental Europe benefits from a reduction in the ability to trade with the United Kingdom,” he told the BBC.

Britain could slash corporation tax to 10% if the EU refuses to agree a post-Brexit free trade deal or blocks UK-based banks from accessing its market, the Sunday Times reported yesterday, citing an unidentified source.

The newspaper said the idea of halving the UK’s headline rate from 20% had been put forward by prime minister Theresa May’s advisers amid growing fears other EU member states will take a hard line in Brexit negotiations.

The tax cut would be used to try and persuade the EU to grant “passporting” rights for financial services firms to continue operating across the EU, the newspaper said.

At a Brussels summit last week EU leaders were clear they would not allow Britain to “cherry pick” things such as free access to the market for certain sectors without taking on the full responsibilities of EU membership.

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