By Andy Smith on 16/12/2022

Andy Smith, Head of Banking, discusses some of the challenges and opportunities facing the banking and financial services sector

Money lenders have never been popular.  But they risk once again becoming figures of hate as they were during the global financial crisis if they don’t navigate the next year with caution and compassion.   Communication will be key.

Banks have been waiting for interest rates to rise for years.  Profitability increases with interest rate hikes, as banks have cash holdings with central banks.  The higher yield on this cash normally goes directly to earnings.  There is also more flexibility in the interest rates paid for deposits and the pricing of loans, leading to increased margins.

It is unfortunate for banks that while this ‘boon’ has finally arrived, it coincides with a cost-of-living crisis and predictions of a significant economic downturn.  Navigating this will prove to be the defining challenge for banks in 2023 – and how they communicate their actions will be critical.

We have already seen UK banks having to ‘promise’ to do more to support residential mortgage customers as rates rise, following meetings with politicians and regulators.  Other countries have proposed windfall taxes.

The issue of increased profitability – not through their direct actions but because of the actions of central banks and increasing interest rates – and the possibility of higher bonuses will make the full year 2022 reporting season difficult for banks and their CEOs to navigate.  The ‘because the board believe I am worth it’ defence runs the risk of backfiring and being very tone deaf this time around:commentators may suggest the profits aren’t because the bankers are good, but simply because they are lucky.

Looking beyond results season, the jury is also out as to whether higher interest rates will be successful in reducing inflation in the near term.  Higher rates and higher inflation will weaken the capacity of debtors to service their loans, and we are likely to see corporate books driving provisions for all banks.   We are also seeing increased costs – due to expectations of colleagues and the fight for talent in tight labour markets.

Banks may also find themselves in the spotlight on what the UN recently called ‘dishonest climate accounting’.   According to Accenture around one-third of the world’s 2000 biggest firms by revenue now have net zero goals – but 93pc of these have no chance of hitting these goals without doing more than they are doing now.  While it is a credible argument to help the transition by working with firms to help them decarbonise, more pressure could be coming from institutional investors and pressure groups over the role banks are playing in helping protect the planet for future generations.

For more information on the services our Banking practice can provide, please contact: andy.smith@powerscourt-group.com