U.K. Banks Rally on Announcement of New Leverage Ratio

The U.K.’s leading banks are well on their way to a thorough post-financial-crisis recovery. The next hurdle is calculating their litigation costs.

Institutional Investor Magazine

November 3, 2014

By Robert Stowe England

For months investors in U.K. banks have been bracing themselves for the imposition of still higher capital requirements from the country’s regulators. But when the Bank of England finally announced the introduction of the new leverage ratio for the banks on Friday, long-disappointed investors in bank shares cheered, pushing up Barclays’ share price by 8.2 percent on the day and the Royal Bank of Scotland’s by 6.2 percent.

In part, the October 31 surge reflected the fact that the new leverage charge will be lower than many analysts had feared. Perhaps more important, though, is the robust health of the banks. The five major U.K. lenders — Barclays, RBS, Lloyds Banking Group, HSBC Holdings and Standard Chartered — have reached an important milestone in their long recovery: All now have higher capital levels than they did before the financial crisis. Retail banking operations have returned to strong profitability, buoyed by a resurgent U.K. economy, boosting return on equity.

“Animal spirits are back,” says Thomas Moore, fund manager for the U.K. Equity Income Unconstrained Fund at Standard Life Investments in Edinburgh, which has holdings of undisclosed size in U.K. banks. “Core profitability in retail and business banking is high and sustainably high,” in significant part because the U.K. economy has been growing at 3 percent this year, the fastest pace in the developed world, he adds.

The improving health and prospects for the Big Five led Richard McCarthy, U.K. head of banking at KPMG in London, to declare in a September report that banks have “turned a corner” on their way to full recovery from the financial crisis — although each of the banks is at a different stage on the path.

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Robert Stowe England is an author and financial journalist who has specialized in writing about financial institutions, financial markets, retirement income issues, and the financial impact of population aging.

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