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UNITED KINGDOM COMMERCIAL BANKING REPORT INCLUDES 5-YEAR FORECASTS TO 2020

Published by:BMI Research

United Kingdom Commercial Banking Report Q1 2017 INCLUDES 5-YEAR FORECASTS TO 2020

Part of BMI’s Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: October 2016

ISSN: 2041-322X

BMI Research 2 Broadgate Circle London EC2M 2QS United Kingdom Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: [email protected] Web: http://www.bmiresearch.com

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CONTENTS

BMI Industry View ............................................................................................................... 7 Table: Commercial Banking Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Table: Commercial Banking Sector Key Ratios, August 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Table: Annual Growth Rate Projections 2015-2020 (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Table: Ranking Out Of 75 Countries Reviewed In 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Table: Commercial Banking Sector Indicators, 2013-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

SWOT .................................................................................................................................... 9 Commercial Banking .................................................................................................................................. 9

Political ................................................................................................................................................. 11

Economic ............................................................................................................................................... 12

Operational Risk ..................................................................................................................................... 13

Industry Forecast .............................................................................................................. 14 Table: UK Banking Sector Risk Snapshot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Commercial Banking Risk/Reward Index ....................................................................... 21 Developed States Commercial Banking Risk/Reward Index .............................................................................. 21

Table: Developed States Commercial Banking Risk/Reward Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Market Overview ............................................................................................................... 23 Developed States Commercial Banking Outlook ............................................................................................ 23

Table: Banks' Bond Portfolios, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Table: Comparison of Loan/Deposit & Loan/Asset & Loan/GDP Ratios, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Table: Comparison of Total Assets & Client Loans & Client Deposits (USDbn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Table: Comparison Of USD Per Capita Deposits, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Economic Analysis ................................................................................................................................... 26

Competitive Landscape .................................................................................................... 33 Market Structure ..................................................................................................................................... 33

Protagonists .......................................................................................................................................... 33 Table: Protagonists In The UK's Commercial Banking Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Definition Of The Commercial Banking Universe ......................................................................................... 34

List Of Banks ......................................................................................................................................... 34 Table: BBA Member Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Company Profile ................................................................................................................ 39 Barclays ................................................................................................................................................ 39

Table: Stock Market Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Table: Balance Sheet (GBPmn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Table: Balance Sheet (USDmn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Table: Key Ratios (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

HSBC .................................................................................................................................................... 43 Table: Stock Market Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

United Kingdom Commercial Banking Report Q1 2017

Table: Balance Sheet (GBPmn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Table: Balance Sheet (USDmn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Table: Key Ratios (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Lloyds Banking Group .............................................................................................................................. 47 Table: Stock Market Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Table: Balance Sheet (GBPmn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Table: Balance Sheet (USDmn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Table: Key Ratios (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Royal Bank of Scotland ............................................................................................................................. 51 Table: Stock Market Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Table: Balance Sheet (GBPmn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Table: Balance Sheet (USDmn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Table: Key Ratios (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Santander .............................................................................................................................................. 55 Table: Stock Market Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Table: Balance Sheet (GBPmn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Table: Balance Sheet (USDmn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Table: Key Ratios (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Global Industry Overview .................................................................................................. 58 Global Commercial Banking Outlook .......................................................................................................... 58

Regional Outlooks .................................................................................................................................. 60

Demographic Forecast ..................................................................................................... 65 Table: Population Headline Indicators (United Kingdom 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

Table: Key Population Ratios (United Kingdom 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

Table: Urban/Rural Population & Life Expectancy (United Kingdom 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

Table: Population By Age Group (United Kingdom 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

Table: Population By Age Group % (United Kingdom 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Methodology ...................................................................................................................... 70 Industry Forecast Methodology ................................................................................................................ 70

Sector-Specific Methodology .................................................................................................................... 71

Risk/Reward Index Methodology ............................................................................................................... 72 Table: Commercial Banking Risk/Reward Index Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Table: Weighting Of Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

United Kingdom Commercial Banking Report Q1 2017

BMI Industry View

Table: Commercial Banking Indicators

Date Total

assets Client loans

Bond portfolio Other

Liabilities and

capital Capital Client

deposits Other

August 2015, GBPbn 6,996.3 1,623.5 189.9 5,182.8 6,996.3 575.3 1,608.7 4,812.3

August 2016, GBPbn 7,588.2 1,695.1 203.8 5,689.2 7,588.2 601.2 1,711.6 5,275.5

% change y-o-y 8.5% 4.4% 7.3% 9.8% 8.5% 4.5% 6.4% 9.6%

August 2015, USDbn 10,735.8 2,491.3 291.5 7,953.0 10,735.8 882.8 2468.5 7953.0

August 2016, USDbn 9,969.3 2,227.1 267.8 7,474.5 9,969.3 789.8 2248.7 7474.5

% change y-o-y -7.1% -10.6% -8.1% -6.0% -7.1% -10.5% -8.9% -6.0%

Source: BMI; Central banks; Regulators

Table: Commercial Banking Sector Key Ratios, August 2016

Loan/deposit ratio Loan/asset ratio Loan/GDP ratio GDP Per Capita, USD Deposits per capita, USD

99.04% 22.34% 89.79% 44,616.8

Rising Rising Rising na na

na = not available. Source: BMI; Central banks; Regulators

Table: Annual Growth Rate Projections 2015-2020 (%)

Assets Loans Deposits

Annual Growth Rate 3 5 6

CAGR 1 3 5

Ranking 78 67 60

Source: BMI; Central banks; Regulators

United Kingdom Commercial Banking Report Q1 2017

Table: Ranking Out Of 75 Countries Reviewed In 2016

Loan/deposit ratio Loan/asset ratio Loan/GDP ratio

28 79 24

Local currency asset growth Local currency loan growth Local currency deposit growth

72 59 56

Source: BMI; Central banks; Regulators

Table: Commercial Banking Sector Indicators, 2013-2020

2013 2014 2015e 2016f 2017f 2018f 2019f 2020f

Total assets, GBPbn 7,413.7 7,004.3 6,862.5 6,896.9 6,827.9 6,964.4 7,138.6 7,352.7

Total assets, USDbn 12,281.5 10,913.4 10,111.3 9,015.5 9,043.6 9,285.9 9,518.1 9,803.6

Client loans, GBPbn 1,589.9 1,606.6 1,642.7 1,683.7 1,700.6 1,768.6 1,848.2 1,940.6

Client loans, USDbn 2,633.9 2,503.2 2,420.3 2,201.0 2,252.4 2,358.1 2,464.2 2,587.4

Client deposits, GBPbn 1,491.6 1,567.2 1,653.8 1,728.3 1,797.4 1,869.3 1,981.5 2,100.3

Client deposits, USDbn 2,471.0 2,441.9 2,436.8 2,259.2 2,380.7 2,492.4 2,641.9 2,800.5

e/f = estimate/forecast. Source: BMI; Central banks; Regulators

United Kingdom Commercial Banking Report Q1 2017

SWOT

Commercial Banking

SWOT

Strengths ■ A long history of international banking and financial innovation, coupled with a strong

regulatory and legal environment, ensure that the UK remains an attractive destination

for financial services.

■ The convenient time zone allows banks and other financial firms to trade in American

and Asian markets simultaneously.

■ The sector has significantly reduced its reliance on short-term wholesale funding,

improving its position against liquidity risk.

■ British banks have significantly improved their capital ratio over the last five years.

The aggregate weighted average Basel III common equity Tier 1 capital ratio for the

sector stood at over 12% in 2015, up from 7.2% in 2011.

Weaknesses ■ The financial crisis severely weakened the biggest players, with RBS and Lloyds

requiring substantial state intervention. Unwinding defunct assets and repairing

balance sheets will remain a problem for the medium to longer term.

■ Sovereign support capacity for the banking sector is considerably lower than in the

pre-financial crisis period, particularly given the sheer size of the UK banking sector

relative to GDP and the steady rise in public debt levels.

■ High levels of household indebtedness, mostly tied up in mortgages, mean asset

quality may suffer in a rising interest rate or slowing growth environment.

Opportunities ■ Strong asset quality, adequate capital buffers, a competitive business and tax

environment, and relatively robust long-term growth outlook make banks well placed

to post a strong profit recovery over the medium-term, especially if interest rates

begin rising.

Threats ■ The UK's decision to leave the EU could prompt large international banks to

headquarter elsewhere if the UK loses passporting rights to the EU, leading to a long-

term decline in the financial services industry.

United Kingdom Commercial Banking Report Q1 2017

SWOT - Continued

■ A deterioration in eurozone growth could lead to a further deterioration in asset quality

given the high degree of interdependence and exposure among banks in the

European market.

■ The UK banking sector is highly exposed to the Chinese economy, with claims on

China equal to 1.5x aggregate Tier 1 capital levels.

■ Loan growth is still largely being driven by households, which are already quite highly

levered.

United Kingdom Commercial Banking Report Q1 2017

Political

SWOT Analysis

Strengths ■ One of the world's oldest and most entrenched parliamentary democracies, and

therefore a country that scores highly on political stability and institutional strength.

■ Although not irreversible, a long running peace process in Northern Ireland, supported

by successive Conservative and Labour governments, appears to have brought to an

end over a quarter of a century of damaging secessionist armed conflict.

Weaknesses ■ The Scottish National Party will remain a strong political force despite the No

campaigning winning in the Independence referendum. It was a very close vote, and

it is likely that further devolution of powers will be extended to Holyrood and the issue

of independence will continue to linger.

■ Disenfranchisement following the financial crisis could see hung parliaments become

a more frequent outcome in general elections.

Opportunities ■ Despite protestations from many inside the European Union that Westminster cannot

cherry pick which treaties and agreements it wants to remain a part of, the UK has

received support among some Member States for reform of the single market and

could play a significant role in this process.

Threats ■ The UK vote to leave the EU in the June 23 referendum suggests that the country

could find itself increasingly isolated on the world stage, losing clout in global military

and economic affairs.

United Kingdom Commercial Banking Report Q1 2017

Economic

SWOT Analysis

Strengths ■ A flexible exchange rate, access to the European single market and an increasingly

competitive corporate tax rate.

■ Strong institutional quality and protection of property rights which remain highly

appealing to foreign investors.

Weaknesses ■ Excessive leverage in the private sector is holding back the recovery.

■ Growth in labour productivity has been very subdued since the global financial crisis,

and the Office of Budget Responsibility now forecasts permanently lower trend

growth.

Opportunities ■ The government's ambitious reform agenda, if successful, could see the UK economy

become more competitive and dynamic over the longer term compared to its

European peers.

■ The UK vote to leave the EU offers an opportunity for the UK to deepen trade ties with

higher growth markets globally, at more favourable terms as new bilateral trade deals

are negotiated.

Threats ■ A housing and real estate 'bubble' has developed in recent years which has recently

shown signs of re-inflating. Given that most household wealth is tied largely to

property, this is a major drag on consumer spending.

■ Overstretched public finances have left little room to invest significantly in education

and public-private investment projects which could hinder longer-term growth

potential.

■ A prolonged period of uncertainty over the UK's future relations with the EU will act as

a heavy drag on growth potential in the coming years.

United Kingdom Commercial Banking Report Q1 2017

Operational Risk

SWOT Analysis

Strengths ■ A flexible labour market and skilled workforce (particularly in the finance industry).

■ Ease of setting up new businesses and a relatively straightforward tax structure.

■ Strong protection of property rights.

Weaknesses ■ A relatively large government sector in poorer parts of the UK such as northern

England, where the state is a major employer.

Opportunities ■ The government is promoting the industrial sectors as a source of growth and is

reducing the corporate tax rate to encourage investment. The government is also

seeking to expand the aerospace and green technology industries, which will similarly

benefit companies involved with these sectors.

Threats ■ Although the financial services industry has become one of the more innovative and

dominant sectors in the economy, the banking sector remains extremely weak. A

renewed constriction in credit conditions would significantly affect lending.

■ The government is seeking to cap the level of immigration into the UK, which could

reduce the quality of the labour force and the flexibility of the labour market over the

longer term.

United Kingdom Commercial Banking Report Q1 2017

Industry Forecast

BMI View: Falling credit demand will limit the impact of the Bank of England's efforts at boosting lending

to the real economy via monetary easing and regulatory changes. Lending, profitability and asset quality

will suffer as economic growth slows in the coming year, but systemic risks remain low and the long-term

outlook remains solid. The potential negative impact of Brexit on the UK financial services sector is much

more severe for investment banking relative to commercial banking, although political uncertainty remains

too high to have a firm view at this stage.

The UK's decision to leave the EU will impact the UK banking sector in various ways, with potentially far

greater negative implications for investment banking relative to commercial banking. With regards to

commercial banking, much weaker real GDP growth in the coming quarters will drag on credit demand and

asset quality, while Brexit-related market volatility, uncertainty and interest rate declines will have a similar

effect on credit supply and profitability. Longer term, however, the industry appears on solid footing given

that the starting levels of capital adequacy and asset quality are fairly robust (see 'Risk Snapshot' section

below), while the UK economy remains fundamentally sound from a structural perspective.

Credit Growing At A Healthy Clip

UK - Bank Lending By Sector, % chg y-o-y

Source: Bank of England

United Kingdom Commercial Banking Report Q1 2017

Commercial Banking: Credit Demand Will Be Biggest Impediment To Loan Growth

Apart from lowering the base rate from 0.50% to 0.25% on August 3, the Bank of England (BoE) has made

several policy changes aimed at supporting credit conditions and economic growth which we expect to have

only a relatively minimal impact on bank lending to the real economy. The BoE relaxed capital

requirements by removing banks' counter-cyclical capital buffer in a bid to increase the supply of bank

loans. It also launched a Term Funding Scheme (TFS) which allows banks and building societies to take out

four year loans from the BoE at 'close to' the base rate. The rate of interest is conditional on maintaining or

increasing lending volumes, and if these targets are not hit lenders will face a penalty funding cost of 'at

most' the base rate plus 25 basis points (bps). The conditionality may not prove to be a major incentive for

banks to boost lending, given that the base rate plus 25bps is not a particularly punitive rate of interest

relative to current market funding conditions for banks.

Falling Rates A Relief For Consumers

UK - Fixed Mortgage Rates & Bank of England Base Rate, %

Source: Bloomberg

The TFS is also aimed at encouraging banks to pass on lower interest rates to borrowers without a

significant hit to their net interest margins. Preliminary evidence that the BoE has been successful in

encouraging the transmission of policy rate cuts to the real economy includes a drop in mortgage rates,

United Kingdom Commercial Banking Report Q1 2017

although it is difficult to say how much of this is due to the TFS. Nevertheless, we expect the main

impediment to increasing the volume of bank lending will come from the demand side. This is particularly

true for the non-financial corporate sector, where a variety of survey data indicates a sharp drop in

investment intentions and waning credit demand following the referendum, and the BoE's corporate bond

purchase programme may encourage greater recourse to debt financing.

Outlook For Corporate Credit Growth Deteriorating

UK - Business Survey, Investment Intentions (LHS) & Banking Lending Survey, Corporate Credit Demand By Size Of Firm, Net % Balance

Note: Positive balances indicate that lenders, on balance, expected demand to be higher over the next three months. Source: Bank of

England

Households, on the other hand, continue to exhibit relatively healthy levels of credit demand for both

mortgage loans and consumer credit, according to the BoE's bank lending survey. Preliminary post-Brexit

data suggests that the referendum failed to have a significant impact on consumer confidence or labour

market conditions in Q316. Meanwhile, for mortgage holders, disposable incomes have actually been

boosted by falling mortgage rates since the BoE's monetary easing measures were enacted.

United Kingdom Commercial Banking Report Q1 2017

Households Still Demanding Credit

UK - Bank Lending Survey, Household Credit Demand, Net % Balance

Note: Positive balances indicate that lenders, on balance, expected demand to be higher over the next three months. Source: Bank of

England

However, we see several reasons to believe that household credit demand will steadily decline over the

coming quarters. Rising commodity prices and rapid pound depreciation over the past year will drive a rapid

uptick in inflation, a process which is already underway (see chart below). In the context of a general

slowdown in economic activity forecasted for 2017, nominal wage growth will also stagnate in our view,

together implying a significant contraction of real wage growth in the coming year which will erode

purchasing power, consumer confidence, and credit demand.

From a broader structural perspective, we see limited scope for additional leveraging up by UK households.

The UK household savings ratio is near an all-time low, while total debt and the debt servicing ratio are

among the highest in the EU at 87.4% and 9.7%, respectively in Q116. Together these imply a high

sensitivity of household spending and credit demand to economic downturns.

United Kingdom Commercial Banking Report Q1 2017

Real Incomes To Be Squeezed

UK - Average Weekly Earnings ex Bonus, Retail & Consumer Price Index, % chg y-o-y

Source: ONS

Investment Banking: Brexit Poses Major Risks

As the centre of the European financial system, the impact of Brexit on the City of London and the country's

financial services sector as a whole is likely to be meaningful. Financial services accounts for

approximately 7.5% of total national income, and in 2014 contributed 11.5% of total government tax

receipts. We expect London to maintain its status as a global financial centre, but its importance will very

likely diminish to at least some degree. In a worst case scenario, the loss of passporting rights to the EU and

limits on euro clearing (a GBP435bn market) capabilities for banks domiciled in the UK could lead to a

sharp decline in the UK's investment banking industry over the next decade.

The European Central Bank has tried unsuccessfully to ban the clearing and settlement of euro-transacted

deals in the UK, in part because the European courts have respected the importance of equal treatment for

all countries in the EU internal market. This may now change post-Brexit. Clarity over the UK's future

relationship with the EU will likely take years to emerge, and at the very least the upcoming period of

United Kingdom Commercial Banking Report Q1 2017

uncertainty will stifle inward investment and the expansion of the sector, particularly in light of suggestions

that Prime Minister Theresa May's government will not prioritise financial services in exit negotiations.

Nevertheless, major global banks that are headquartered in the UK, such as HSBC, might be forced to shift

some of their EU-focused operations to the continent, with London finding itself increasingly on the outside

of the eurozone financial system over the long term. Foreign bank branch assets represent around 30% of

total UK bank assets, so the long-term dislocation if they are forced to move could be significant.

The impact on the City could vary widely for each type of service, and the EU's response to the UK's exit

and the eventual deal reached between both parties will be critical. On the upside, similar to the

merchandise trade, the UK's financial services industry could over time successfully re-orient itself towards

other markets, and in particular emerging markets whose share of global GDP will continue rising in the

coming decade. Indeed, London has already established itself as the primary yuan-clearing centre outside of

China. More broadly, the City of London's infrastructure in terms of both physical and human capital means

it will maintain its vital role in the global financial industry.

Table: UK Banking Sector Risk Snapshot

Poor Sub-Optimal Good Excellent

Asset Quality ↓

Funding Structure O

Capital Adequacy O

Sovereign Support Capacity ↓

Notes: Arrows signal trend (↑ = improving, O = stable, ↓ = deteriorating). Source: BMI

Asset Quality: Improvements in asset quality in the banking sector have been steady since 2011, supported

by the UK's economic outperformance since this period. The aggregate non-performing loan (NPL) ratio

dropped to 1.5% in 2015, from 3.1% in 2013. This is significantly better than most eurozone peers, where

NPL ratios remain as high as 18.0% in Italy and 14.9% in Ireland. The UK's vote to leave the EU in the

June 2016 referendum will lead to slowing growth and rising financial stress on some highly indebted

households and non-financial corporates, dragging on asset quality. Nevertheless, the NPL ratio in this case

is still expected to compare favourably on a regional level.

United Kingdom Commercial Banking Report Q1 2017

Funding Structure: UK banks are on aggregate primarily deposit funded, which is a positive for the overall

stability of the sector as it reduces the need to fund via interbank borrowing or through capital markets,

which can be more volatile and unreliable during periods of heightened financial volatility. UK banks have

persistently reduced their reliance on wholesale funding in the aftermath of the global financial crisis, with

the aggregate short-term wholesale funding ratio dropping to 12.6% in 2014, from 25% in 2008.

Furthermore, around 40% of total deposits are time deposits rather than overnight deposits, which is another

positive for stability, as time deposits are less prone to deposit flight.

Capital Adequacy: British banks have significantly improved their capital ratio over the last five years.

The aggregate weighted average Basel III common equity Tier 1 capital ratio for the sector stood at over

12% in 2015. This marks a considerable improvement from 2011 levels when the ratio stood at just 7.2%.

Sovereign Support Capacity: The government was already forced to intervene in the banking sector after

the 2008 global financial crisis. The government put together a rescue package worth GBP500bn, and

several banks, including the Royal Bank of Scotland, HBOS and Lloyds TSB received financing from the

government. The deep recession that followed the global financial crisis took a severe toll on UK public

finances. Debt/GDP, including the banking sector bailout, soared to GBP2.2trn by 2011 (120% of GDP),

and although the previous Conservative-led coalition government and the current Conservative government

has made deficit and debt reduction a priority, public sector net debt levels (including the bank bailouts)

remain at around GBP1.8trn (98% GDP).

Efforts to narrow the budget deficit have fallen short of target, reducing fiscal manoeuvring room.

Sovereign support capacity for the banking sector is considerably lower than in the pre-financial crisis

period, particularly given the scale of the UK banking sector relative to GDP (372%).

United Kingdom Commercial Banking Report Q1 2017

Commercial Banking Risk/Reward Index

Developed States Commercial Banking Risk/Reward Index

Commercial Banking Risk/Reward Index Methodology

Since Q108, we have described numerically the banking business environment for each of the countries

analysed by BMI. We do this through our Commercial Banking Industry Risk/Reward Index (RRI), a

measure that ensures we capture the latest quantitative information available. It also ensures consistency

across all countries. Like all of BMI's Industry Risk/Reward Indices, its takes into account the Rewards on

offer within the banking sector in a given country, but also the Risks to investors being able to realise those

opportunities. The overall index is weighted 70% towards Rewards and 30% towards Risks.

Within the Rewards category, we look at factors that are specific to the banking industry (accounting for

60% of the score within this category), and elements that relate to that country in general (accounting for

40% of the weighting). These include, but are not limited to, total assets, asset and loan growth, GDP and

taxation. Likewise on the Risks side, we look at industry-specific Risks (weighted 40% of the Risks total)

and country-specific Risks (weighted 60%). These include, but are not limited to, the regulatory framework

and environment, the competitive environment, financial risk, legal risk and policy continuity.

In general three aspects need to be borne in mind when interpreting the RRIs. The first is that the Industry

Rewards element is the most heavily weighted of the four elements, accounting for 42% (60% of 70%) of

the overall Index. Second, if the Industry Rewards score is significantly higher than the Country Rewards

score, within the Rewards category, it usually implies that the banking sector is (very) large and/or

developed relative to the general wealth, stability and financial infrastructure in the country. Conversely, if

the industry score is significantly lower, it usually means that the banking sector is small and/or

underdeveloped relative to the general wealth, stability and financial infrastructure in the country. Third,

within the Risks category, the industry-specific elements (ie, how regulations affect the development of the

sector, how regulations affect competition within it, and Moody's Investor Services' Ratings for local

currency deposits) can be markedly different from BMI's long-term Country Risk Index for a given market.

United Kingdom Commercial Banking Report Q1 2017

Table: Developed States Commercial Banking Risk/Reward Index

Limits of Potential Returns Risks to Potential Returns Overall

Market Structure Country Structure Market Risks Country Risks Index Ranking

Australia 30.0 85.0 93.3 76.0 61.3 35

Austria 70.0 75.0 86.7 76.0 74.5 16

Canada 80.0 85.0 100.0 78.0 83.4 5

Denmark 63.3 75.0 76.7 62.0 68.0 29

France 83.3 80.0 93.3 76.0 82.3 6

Germany 86.7 82.5 93.3 80.0 85.1 3

Israel 53.3 82.5 90.0 66.0 68.2 26

Italy 80.0 72.5 93.3 70.0 77.7 11

Spain 80.0 77.5 86.7 66.0 77.6 12

Sweden 70.0 75.0 76.7 64.0 71.1 21

Switzerland 73.3 95.0 96.7 82.0 83.8 4

UK 90.0 92.5 100.0 82.0 90.5 1

United States 93.3 85.0 100.0 82.0 89.8 2

Eurozone 93.3 77.5 66.7 70.0 81.5 7

Scores out of 100, with 100 the highest. Source: BMI

United Kingdom Commercial Banking Report Q1 2017

Market Overview

Developed States Commercial Banking Outlook

Table: Banks' Bond Portfolios, 2015

Bond Portfolio, USDbn Bond as % total assets Year-on-year growth %

Australia 161.1 5.6 4.3

Austria* 58.4 5.4 22.9

Canada 179.4 5.0 10.1

Denmark 113.1 20.7 -24.7

France 897.7 10.1 -4.3

Germany 1,202.8 14.3 -4.8

Israel 37.8 11.4 -5.1

Italy 474.7 11.1 1.3

Spain 575.3 18.7 -13.1

Sweden 108.8 10.3 -4.9

Switzerland* 69.7 4.1 11.1

UK 278.8 2.8 3.3

United States 667.9 4.3 3.2

Eurozone 1,780.6 5.8 -3.9

Source: Central banks, regulators, BMI

Table: Comparison of Loan/Deposit & Loan/Asset & Loan/GDP Ratios, 2016

Loan/Deposit

ratio % Rank Trend Loan/Asset

ratio % Rank Trend Loan/GDP

ratio % Rank Trend

Australia 119.6 5 Falling 61.6 24 Falling 149.4 8 Rising

Austria 107.6 13 Falling 45.6 55 Falling 123.0 13 Falling

Canada 119.8 4 Falling 38.3 64 Falling 102.8 20 Rising

Denmark 92.6 35 Rising 56.8 35 Falling 105.5 19 Falling

France 114.1 9 Rising 25.2 73 Falling 98.6 21 Rising

Germany 115.8 8 Rising 52.2 48 Falling 132.9 11 Rising

Israel 76.0 58 Rising 61.7 20 Falling 75.6 30 Rising

Italy 110.6 11 Rising 36.1 68 Falling 85.5 28 Falling

Spain 84.0 28 Rising 62.5 25 Falling 157.6 3 Falling

United Kingdom Commercial Banking Report Q1 2017

Comparison of Loan/Deposit & Loan/Asset & Loan/GDP Ratios, 2016 - Continued

Loan/Deposit

ratio % Rank Trend Loan/Asset

ratio % Rank Trend Loan/GDP

ratio % Rank Trend

Sweden 93.2 32 Rising 28.4 70 Falling 62.6 41 Rising

Switzerland 96.5 42 Falling 60.3 19 Falling 171.2 6 Rising

UK 97.4 27 Rising 24.4 74 Falling 88.6 26 Rising

United States 107.1 14 Rising 76.5 3 Falling 66.3 35 Rising

Eurozone 100.4 25 Rising 55.7 36 Falling 164.8 5 Falling

Source: Central banks, regulators, BMI

Table: Comparison of Total Assets & Client Loans & Client Deposits (USDbn)

2016 2015

Total Assets Client Loans Client Deposits Total Assets Client Loans Client Deposits

Australia 2,973.2 1,831.6 1,531.4 2,882.7 1,758.7 1,442.7

Austria 1,030.9 470.3 437.2 989.6 458.6 418.0

Canada 4,194.0 1,608.0 1,342.5 3,622.7 1,435.5 1,181.5

Denmark 556.5 316.3 341.5 545.4 306.9 338.0

France 9,278.8 2,341.3 2,052.4 8,873.0 2,228.2 1,962.6

Germany 8,606.3 4,493.5 3,881.5 8,392.0 4,338.9 3,729.7

Israel 376.9 232.4 306.0 350.8 217.4 283.8

Italy 4,312.8 1,555.8 1,407.0 4,268.5 1,547.5 1,326.2

Spain 3,071.0 1,918.6 2,283.7 3,070.2 1,927.8 2,237.9

Sweden 1,192.0 338.7 363.2 1,055.9 302.8 327.8

Switzerland 1,804.1 1,087.7 1,127.5 1,792.5 1,091.3 1,114.8

UK 9,015.5 2,201.0 2,259.2 10,111.3 2,420.3 2,436.8

United States 16,182.3 12,384.2 11,558.4 15,559.9 11,683.2 11,008.0

Eurozone 33,936.8 18,896.5 18,827.8 30,806.8 17,238.1 17,008.0

Source: Central banks, regulators, BMI

United Kingdom Commercial Banking Report Q1 2017

Table: Comparison Of USD Per Capita Deposits, 2016

GDP Per

Capita Client Deposits, per

capita Rich 20% Client Deposits, per

capita Poor 80% Client Deposits, per

capita

Australia 1 125 6 62,996

Austria 1 114 3 46,376

Canada 1 86 6 36,997

Denmark 7 114 10 60,009

France 1 86 5 31,737

Germany 1 115 2 43,735

Israel 4 99 5 37,354

Italy 1 77 4 23,528

Spain 1 188 -4 49,576

Sweden 8 67 7 36,868

Switzerland 1 177 6 134,554

UK 1 91 5 34,697

United States 1 62 6 35,661

Eurozone 1 164 0 56,040

Source: Central banks, regulators, BMI

United Kingdom Commercial Banking Report Q1 2017

Economic Analysis

BMI View: Brexit will weigh heavily on UK growth, predominantly in H216 and H117 when uncertainty

over the UK's future relationship with the EU is at its highest. We have revised down our real GDP growth

forecasts for 2016 and 2017 to 1.4% and 0.2% respectively, from 1.8% and 2.2% previously, and see

growth rebounding to 1.6% in 2018. Our longer-term forecasts remain unchanged, however, as we believe

the UK's attractive business environment will maintain its appeal.

In light of the UK vote to leave the EU on June 23, we have revised down our real GDP growth forecasts

for 2016 and 2017 to 1.4% and 0.2% respectively, from 1.8% and 2.2% previously. While we still expect

the UK economy to avert an annual contraction of real GDP in 2017, our revised forecast represents a more

pessimistic view relative to our preliminary assessment in March (see 'Brexit Scenarios: Implications

For Growth', March 23), when we foresaw real GDP growth slowing to around 0.8% in the case of a vote to

leave. Our revised forecasts assume the economy will enter technical recession. We expect real GDP to

contract on a quarter-on-quarter basis in both Q316 and Q416, and come in flat in Q117, before returning to

modest growth in subsequent quarters. For 2018, we have pencilled in a rebound to 1.6% growth and see

upside risks depending on how quickly clarity emerges over the UK's future relationship with the EU.

United Kingdom Commercial Banking Report Q1 2017

Brexit A Heavy Near-Term Burden

UK - Real GDP Growth, % chg

f = BMI forecast. Source: ONS, BMI

Our long-term average growth forecast of 2.1% in 2020-2025 remains unchanged, as we believe the UK

economy is fundamentally sound, and will ultimately maintain a close relationship with the EU and a fairly

liberal immigration regime. The biggest downside risk to our short and long-term outlook is the potential for

political and financial Brexit contagion to plunge the eurozone into renewed crisis (see 'Brexit

Contagion Could Reignite Eurozone Crisis', June 28).

Three Major Headwinds

Increased Uncertainty To Cause Shelving Of Expansion Plans

Businesses in the UK will essentially face three simultaneous headwinds. Firstly, political instability and

uncertainty over the UK's future relationship with the EU will weigh on already weak business confidence

and limit new hiring, expansion plans, and capital expenditures as businesses will require higher profit

margins to compensate for higher uncertainty. While we believe that the UK may ultimately retain access to

the EU single market, how it gets there is fraught with uncertainty. Following the resignation of Prime

United Kingdom Commercial Banking Report Q1 2017

Minister David Cameron, and considering the lack of a clear action plan being put forth by either the current

government or backers of the 'Leave' campaign, a roadmap for investors is unlikely to emerge until Q416 at

the earliest, when a new Conservative government takes the helm. Uncertainty facing investors goes beyond

the UK's future relationship with the EU, but extends to the future of the UK itself as Scottish political

leaders push for another independence referendum.

Growth Slowing Heading Into Brexit

UK - Composite Purchasing Managers' Index

Source: Markit, Bloomberg

Inward FDI, a boon to the UK economy in recent years, will also suffer in the near term. With a more

competitive tax and regulatory environment than the much of the EU, the UK has been an attractive

destination for foreign firms looking for a gateway into Europe. FDI into the City of London, which is

among the largest sources of inward FDI to the entire UK economy, will temporarily dry up as its future as

the EU's financial centre comes into doubt. Meanwhile, our Infrastructure team believes that the UK

decision to leave the EU will see the UK construction and infrastructure sector also enter a period of

investment hiatus.

United Kingdom Commercial Banking Report Q1 2017

Brexit Has Already Dragged On Confidence

UK - Economic Sentiment Indicator (RHS), Retail & Services Confidence Index

Source: European Commission

Rising Savings Rate Will Provide A Shock To Consumer Focussed Economy

Secondly, the household savings rate is set to rise sharply from a very low base, causing a shift in consumer

demands which will in turn force a reorganisation in the UK's consumer-focused production structure.

Household consumption growth has been the main driver of real GDP growth in the UK from 2012-2015,

but is poised to slow considerably in the coming quarters. A much slower pace of job creation, uncertainty

with regard to job security and the UK economy, and the very high likelihood of at least some Brexit-related

layoffs will drag on confidence, causing consumers to reduce spending. Given household savings rate in the

UK are at historically low levels, the rise is likely to be rapid. While this will have medium-term benefits in

terms of reducing the UK's external imbalances and raising investment, it will prove a short-term drag on

overall economic output.

United Kingdom Commercial Banking Report Q1 2017

Rising Inflation To Drive Down Real Wage Growth

UK - Real Wage Growth & Consumer Price Index

Source: ONS, BMI

Pound Weakness Will Be A Near-Term Drag As Export Benefits Take Time

Thirdly, the sharp fall in the value of sterling will act as an additional obstacle to business expansion as it

will immediately undermine the profitability of consumer and import-reliant businesses, while the benefits

are likely to be seen at a later stage.

To be sure, over the medium term, a cheaper currency will ultimately prove to be a positive factor helping

to rebalancing the UK economy and support exports. Outside the EU the UK will be able to forge closer

relationships with more rapidly growing economies, and will be able to negotiate trade deals that are more

directly beneficial as opposed to the current system designed to benefit the EU as a whole.

United Kingdom Commercial Banking Report Q1 2017

Export Growth Resilient To GBP Volatility

UK - Export Volume & GBP Nominal Effective Exchange Rate

Source: Bloomberg, Barclays, ONS

However, it will take time for export orientated businesses to raise production, which will be further

complicated as the UK will have to renegotiate all bilateral trade deals which previously fell under the

umbrella of the EU, all during a time of political transition, thus acting as a net drag in the near term.

Political and economic shockwaves of a Brexit across the European continent will similarly weigh on

business sentiment and confidence in the EU, thus dragging on external demand. Rapid depreciation of the

Chinese yuan following Brexit also suggests that emerging markets may come under additional stress,

further limiting external demand in the coming quarters.

Policy Response Of Limited Benefit

As mentioned earlier, we expect the Bank of England (BoE) to tolerate higher inflation in the coming year.

Falling gilt yields post-Brexit suggest that the UK's safe haven status is not in question despite its twin fiscal

and current account deficits, which will allow the BoE to respond in a proactive way to stabilise markets

and confidence. We expect extraordinary measures to support banking sector liquidity, and cannot rule out

rate cuts or a restart of the bank's quantitative easing programme. However, with policy rates near zero and

United Kingdom Commercial Banking Report Q1 2017

bond yields at historic lows, we believe there potential effectiveness of any additional monetary stimulus

will be severely limited in terms of its impact on the real economy.

Meanwhile, the fiscal policy response will be similarly constrained by the Conservative government's

ongoing consolidation drive. Although the government is retreating from its previous stance that an

emergency austerity budget would be necessary post-Brexit, Finance Minister George Osborne has

nevertheless continued to suggest that higher taxes and budget cuts will be necessary, implying a

potential fiscal drag on growth to in the short term. That said, the resignation of David Cameron has opened

the door to some change in policy direction once a new government comes into power, although if anything

we would expect only a minor relaxation of budget consolidation targets.

United Kingdom Commercial Banking Report Q1 2017

Competitive Landscape

Market Structure

Protagonists

Table: Protagonists In The UK's Commercial Banking Sector

Central bank: Bank of England

www.bankofengland.co.uk

The Bank of England is the UK's central bank. It was founded in 1694, nationalised in 1946 and formally granted independence in 1997. It has two main purposes: to ensure monetary stability and to contribute to financial stability. In terms of monetary stability, the Bank's Monetary Policy Committee decides the short-term level of interest rates to meet the government's inflation target. The Bank's role as provider of financial stability is formalised in a memorandum of understanding that was reached with the Treasury and the Financial Services Authority in 1997 and updated in 2006. In 2012 the Prudential Regulation Authority was created as one of the two successors to the FSA; in 2013 it began operating alongside the FCA to regulate the banking sector. The PRA's two statutory objectives are to promote the safety and soundness of banks and to secure appropriate protection for policyholders.

Principal banking regulator: Financial Conduct Authority (FCA)

www.fca.org.uk

Although the Bank of England has responsibility for the maintenance of financial stability, commercial banks and other financial services organisations in the UK are supervised by the FCA. The authority is an independent, non-governmental body established in 2013 to replace the Financial Services Authority (FSA). The FCA aims to protect consumers, ensure the industry remains stable, and promote healthy competition between financial services providers. The FCA is accountable to the Treasury.

Banking trade association: British Bankers' Association (BBA)

www.bba.org.uk

The BBA is the leading association for the UK banking and financial services sector, representing over 200 full members from 50 countries on a range of British and international banking issues.

Banking trade association: European Banking Federation (EBF)

www.ebf-fbe.eu

The EBF, based in Brussels, is 'the united voice of banks established in Europe'. It is a forum for best practice, legislation, initiatives and common positions. The federation represents, defends and promotes the interests of its members and the industry, as well as assisting new members in accession procedures to the EU itself or to the eurozone. The EBF's members include the national banking associations of the 28 EU member states, Switzerland, Norway, Liechtenstein and Iceland. Its associate members include the banking associations from Albania, Andorra, Armenia, Azerbaijan, Bosnia-Herzegovina, FYROM, Moldova, Monaco, Montenegro, Russia, Serbia, Turkey, and Ukraine.

United Kingdom Commercial Banking Report Q1 2017

Definition Of The Commercial Banking Universe

The British Bankers' Association has over 200 full members. We have shown the names of all the BBA

members in the table below.

List Of Banks

Table: BBA Member Banks

Abbey National Treasury Services plc

ABC International Bank plc

ABN AMRO Bank NV

Adam & Company plc

Ahli United Bank (UK) Plc

Al Rayan Bank

Aldermore Bank Plc

Allied Irish Bank (GB) / First Trust Bank (AIB Group (UK) plc)

Allied Irish Bank plc

ANZ Bank (Europe) Ltd

Arbuthnot Latham & Co Ltd

Australia & New Zealand Banking Group Ltd

Banca Monte Dei Paschi di Siena SpA

Banco de Sabadell SA

Banco Santander Group

Banco Santander Totta SA

Bank J Safra Sarasin (Gibraltar) Ltd

Bank Leumi (UK) plc

Bank of America NA

Bank of Baroda

Bank of Ceylon (UK) Ltd

Bank of China

Bank of Cyprus UK Limited

Bank of India

Bank of Ireland

Bank of London and the Middle East plc

Bank of Montreal

Bank of Scotland plc

Barclays Bank Group

United Kingdom Commercial Banking Report Q1 2017

BBA Member Banks - Continued

Barclays Bank Trust Company Ltd

Blom Bank France (Formerly Banque Banorabe)

BNP Paribas

BNP Paribas Fortis S.A./N.V.

British Arab Commercial Bank Plc

Brown Shipley & Co Ltd

Butterfield Private (UK) Bank

C Hoare & Co

CAF Bank Ltd

Cambridge & Counties Bank Limited

Canadian Imperial Bank of Commerce

Canara Bank

Cater Allen Ltd

Charity Bank

China Construction Bank (London) Limited

CIBC World Markets plc

Citibank International plc

Citibank NA

Close Brothers Ltd

Clydesdale Bank plc

Commerzbank AG

Commonwealth Bank of Australia

Coutts & Co

Credit Suisse (UK) Ltd

Credit Suisse AG

Credit Suisse International

Crown Agents Bank Ltd

Danske Bank A/S

DB UK Bank Limited

Deutsche Bank AG

Duncan Lawrie Limited

EFG Private Bank Ltd

Europe Arab Bank plc

FBN Bank (UK) Ltd

FCE Bank Plc

Ghana International Bank plc

United Kingdom Commercial Banking Report Q1 2017

BBA Member Banks - Continued

Gulf International Bank (UK) Ltd

Gulf International Bank BSC

Habib Allied International Bank plc

Habib Bank AG Zurich

Habibsons Bank Ltd

Hampshire Trust plc

Harrods Bank Ltd

Havin Bank Ltd

HSBC Bank Group

HSBC Private Bank Ltd

HSBC Trust Company (UK) Ltd

ICICI Bank

ING

Investec Bank Plc

Jordan International Bank plc

JP Morgan Chase Bank Group

JP Morgan Europe Ltd

Julian Hodge Bank Ltd

Kingdom Bank Ltd

Kleinwort Benson Private Bank Ltd

Lloyds Bank Private Banking Ltd

Lloyds Banking Group

Mashreqbank PSC

MBNA Europe Bank Ltd

Metro Bank Plc

Mitsubishi UFJ Trust and Banking Corporation

Mizuho Bank Ltd

Mizuho International plc

Morgan Stanley Bank International Limited

N M Rothschild & Sons Ltd

Nacional Financiera SNC

National Australia Bank Limited

National Bank of Canada

National Bank of Egypt (UK) Ltd

National Bank of Kuwait (International) plc

National Westminster Bank plc

United Kingdom Commercial Banking Report Q1 2017

BBA Member Banks - Continued

Nationwide Building Society

Natixis (formerly Natixis Banques Populaires)

Nedbank Ltd

Nomura Bank International plc

Northern Trust Company

Punjab National Bank

Qatar National Bank SAQ

QIB (UK) plc

Raphaels Bank

Rathbone Investment Management Ltd

Reliance Bank Ltd

Royal Bank of Canada

Royal Bank of Canada Europe Ltd

Sainsbury's Bank plc

Santander UK Group

Schroder & Co Ltd

Scotiabank Europe plc

Scottish Widows Bank plc

Secure Trust Bank plc

SG Hambros Bank & Trust Ltd

Shawbrook Bank Limited

Smith & Williamson Investment Management Ltd

Société Générale

Sonali Bank (UK) Ltd

Standard Bank plc (formerly Standard Bank London Ltd)

Standard Chartered Bank

State Bank of India

State Street Bank and Trust Company

Sumitomo Mitsui Banking Corporation Europe Ltd

Sumitomo Mitsui Trust Bank Limited

Svenska Handelsbanken AB (publ)

Syndicate Bank

TD Bank NV

Tesco Personal Finance plc

The Access Bank UK Limited

The Bank of New York Mellon (International) Ltd

United Kingdom Commercial Banking Report Q1 2017

BBA Member Banks - Continued

The Bank of New York Mellon Group

The Bank of Nova Scotia

The Bank of Tokyo Mitsubishi UFJ Limited

The Co-operative Bank plc

The Norinchukin Bank

The Royal Bank of Scotland Group

The Royal Bank of Scotland N.V.

Triodos Bank

TSB Bank Plc

Tungsten Bank plc

UBS AG

Ulster Bank Ireland Ltd

Ulster Bank Ltd

Union Bancaire Privee UBP

Union Bank UK plc

United Bank UK

United Trust Bank

Vanquis Bank

Virgin Money

VTB Capital Plc

Weatherbys Bank Ltd

Wells Fargo Bank NA

Wesleyan Bank Limited

Westpac Banking Corporation

Source: BMI, BBA, October 2015.

United Kingdom Commercial Banking Report Q1 2017

Company Profile Barclays

SWOT Analysis

Strengths ■ Major global financial services provider.

■ Fully loaded CET1 ratio strengthened to 11.1% in H115.

■ Liquidity pool remains strong.

■ Passed recent EU-wide stress tests.

Weaknesses ■ Legal costs from Libor-scandal and forex-fixing lawsuits.

■ Rapidly shrinking balance sheet.

Opportunities ■ Improved net profit in H115.

■ Transform programme should refocus on core business units.

Threats ■ Rivals moving aggressively to expand their domestic market share in retail banking.

■ Negative press from recent scandals.

■ Tighter regulatory requirements.

■ Credit downgrades.

Company Overview Barclays is a major global financial services provider engaged in retail and commercial

banking, credit cards, investment banking, wealth management and investment

management services, with an extensive international presence in Europe, the US,

Africa and Asia. Barclays operates in more than 50 countries and employs over 130,000

people. It has more than 48mn customers and clients worldwide.

One of the most significant events in Barclays' recent history was the sale of its

lucrative Barclays Global Investors subsidiary, which generated GBP1.8bn (USD2.7bn)

in revenue in 2008 and had over USD1trn in assets under management. The group sold

the division to US investment management firm BlackRock in December 2009 in a

USD13.5bn cash and stock deal. Barclays avoided a fall in pre-tax profit in 2009 as a

result of the sale.

United Kingdom Commercial Banking Report Q1 2017

The bank was soon on the acquisition trail. The group announced an agreement to

acquire UK investment business Standard Life Bank in a cash deal for GBP226mn

(USD346.2mn) in October 2009. The deal added a savings book of about GBP5.5bn

(USD8.4bn) and a mortgage book of around GBP8.8bn (USD13.4bn) in outstanding

balances to Barclays' total assets. Then, in 2012, the bank acquired ING Direct UK,

taking on its GBP10.9bn of deposits and 1.5mn customers.

However, the bank has also faced some difficulties in recent years. In June 2012, it was

fined GBP290mn after admitting misconduct in the alleged manipulation of the London

inter-bank lending rate (Libor). Soon after, both CEO Marcus Agius and Chairman Bob

Diamond resigned, and further investigations were launched. In April 2014, Barclays

reached an out-of-court settlement in the first lawsuit filed over the Libor scandal. And

in May 2015, Barclays was fined USD2.4bn by British and US authorities for conspiring

to manipulate currency markets.

In 2013, the bank launched a 'Transform' programme to recover from losses recorded

in 2012, and improve the capital base in line with new regulatory requirements. This

included a GBP5.8bn rights issue in October 2013. As part of a drive to cut operating

expenses, the bank announced in February that around 10,000-12,000 jobs would be

cut in 2014, following 7,650 job cuts in 2013. However, CEO Anthony Jenkins was

dismissed in July 2015 after not making sufficient progress with the transformation.

The downsizing of the company continues: in June 2015, Barclays Capital sold off its

Wealth and Investment Management unit in Florida, while in October Barclays

announced that it would sell GBP650mn of its performing loan portfolio in an effort to

shore up its balance sheet. The bank plans to further shrink its overseas investment

banking division in the coming years.

Corporate

Highlights In the first half of 2015, Barclays recorded adjusted profit before tax of GBP3,729mn,

up by 11% y-o-y compared to GBP3,349mn in H114. The bank said this reflected

improvements in all core operating businesses, and was supported by a 10% decline in

impairment provisions and a 7% y-o-y cut in operating expenses. Adjusted net profit

increased by 22% to GBP2,155mn over the same period.

Meanwhile, total assets stood at GBP1,197bn at end-June 2015, down 12% from six

months earlier, largely due to a reduction in the derivatives book.

Barclays fully loaded CET1 ratio, under the fourth Capital Requirements Directive

(CRDIV), strengthened to 11.1% by end-June 2015, from 9.9% a year earlier, with risk-

weighted assets down from GBP396bn to GBP377bn over the same period.

After suffering downgrades amid the Libor-fixing scandal and extensive write-downs

(the latest of which by S&P in June 2015), Barclays Bank PLC is rated A- by Standard &

Poor's, 'A' by Fitch, and A2 by Moody's.

United Kingdom Commercial Banking Report Q1 2017

Company Data ■ Website: www.barclays.com

Table: Stock Market Indicators

2009 2010 2011 2012 2013 2014 2015 08-Mar-2016

Market Capitalisation GBP 31,496 31,874 21,477 32,125 43,816 40,161 36,777 28,855

Market Capitalisation USD 50,860 49,695 33,309 52,177 72,586 62,575 54,187 35,341

Share Price GBP 254.95 241.70 162.63 242.39 271.95 243.50 218.90 170.30

Share Price USD 4.12 3.77 2.52 3.94 4.51 3.79 3.23 2.09

Share Price USD, % change (eop) 99.3 -8.5 -33.1 56.1 14.4 -15.8 -15.0 na

Change, year-to-date na na na na na na na na

Shares Outstanding (mn) 12,354 13,188 13,206 13,254 16,113 16,498 16,805 na

na = not available/applicable. Source: Barclays Bank, Bloomberg

Table: Balance Sheet (GBPmn)

2008 2009 2010 2011 2012 2013 2014 2015

Total Assets 2,052,980 1,378,929 1,489,645 1,562,083 1,488,335 1,343,628 1,357,906 1,120,012

Loans & Mortgages 461,815 420,224 427,942 431,934 423,906 434,237 427,767 399,217

Total Deposits 335,505 322,429 345,788 366,032 385,411 431,998 427,704 418,242

Total Shareholders' Equity 47,411 58,478 62,262 63,959 59,986 63,949 65,958 65,864

Earnings per share (GBP) 0.55 0.80 0.28 0.23 -0.05 0.04 -0.01 -0.02

Source: Barclays Bank, Bloomberg

Table: Balance Sheet (USDmn)

2008 2009 2010 2011 2012 2013 2014 2015

Total Assets 2,992,218 2,226,695 2,322,506 2,422,635 2,417,354 2,225,854 2,115,753 1,650,226

Loans & Mortgages 673,095 678,578 667,204 669,886 688,508 719,357 666,504 588,206

Total Deposits 488,999 520,658 539,118 567,679 625,985 715,648 666,406 616,238

Total Shareholders' Equity 69,102 94,430 97,073 99,194 97,429 105,938 102,769 97,044

Earnings per share (USD) 1.01 1.25 0.43 0.36 -0.07 0.06 -0.01 -0.03

Source: Barclays Bank, Bloomberg

United Kingdom Commercial Banking Report Q1 2017

Table: Key Ratios (%)

2008 2009 2010 2011 2012 2013 2014 2015

Return on Assets 0.3 0.5 0.2 0.2 0.0 0.0 0.0 0.0

Return on Equities 14.6 22.4 7.2 5.6 -1.2 1.0 -0.3 -0.7

Loan Deposit Ratio 139.6 133.7 127.3 120.9 112.5 102.2 101.3 96.6

Loan Asset Ratio 22.8 31.3 29.6 28.3 29.1 32.9 31.9 36.1

Equity Asset Ratio 1.8 3.4 3.4 3.5 3.4 4.0 4.1 4.9

Total Risk Based Capital Ratio 13.6 16.6 16.9 16.4 17.0 15.0 16.5 18.6

Tier 1 Capital Ratio 8.6 13.0 13.5 12.9 13.2 11.3 13.0 14.7

Source: Barclays Bank, Bloomberg

United Kingdom Commercial Banking Report Q1 2017

HSBC

SWOT Analysis

Strengths ■ Europe's largest banking group.

■ Hong Kong and the UK's largest bank.

■ One of the most highly capitalised banking groups in the world.

■ Large geographical and market reach.

■ Strong capital ratios.

Weaknesses ■ HSBC was at the forefront of the US subprime crisis as a leading subprime lender in

the market before the crash and has suffered during the economic crisis.

■ Facing more claims over a number of charges that it engaged in fraudulent behaviour

in manipulating currency exchange markets and tax evasion.

■ Reducing private banking by 50%.

■ Withdrawing from Brazil and Turkey.

Opportunities ■ Post-crisis strategy is to concentrate on Asian markets.

■ Profit before tax rose sharply in H115.

Threats ■ Impairment charges have remained a threat, weighing down on capital.

■ Costs and risk of tighter regulatory environment.

■ Announced 25,000 further job cuts.

Company Overview HSBC, with its headquarters in London, is one of the largest banking and financial

services organisations in the world. HSBC's international network includes about 6,100

offices in 72 countries in Europe, the Asia Pacific, the Americas, the Middle East and

Africa. Within this, the lender has 16mn customers and more than 1,100 branches in the

UK. With listings on the London, Hong Kong, New York, Paris and Bermuda stock

exchanges, shares in HSBC Holdings are held by around 213,000 shareholders in 131

countries.

United Kingdom Commercial Banking Report Q1 2017

The bank has operations in retail banking and wealth management, commercial

banking, global banking and markets, and global private banking.

HSBC announced a massive GBP12.5bn (USD17.7bn) rights issue in March 2009 to

improve the group's capital strength and weather economic difficulties. The bank had

been heavily exposed to subprime mortgages prior to the economic crisis. After the

financial crisis the banking group's strategy was to focus on emerging markets. In

February 2010, HSBC's chief executive relocated from London to Hong Kong,

emphasising the bank's commitment to the developing world.

In December 2012, the bank confirmed it would pay GBP1.2bn (USD1.9bn) to US

authorities after an investigation into money laundering concluded the bank had been 'a

conduit for drug kingpins and rogue nations'. The bank promised to fix the problem,

though in April 2014 US federal prosecutors said there was still much work to be done.

Furthermore, in November 2014, regulators penalised six big lenders, HSBC,

JPMorgan, Citigroup, Royal Bank of Scotland, UBS and Bank of America, a combined

USD4.3bn for conspiring to manipulate the foreign exchange market. HSBC's portion of

the fine came in at GBP389mn.

HSBC's Swiss subsidiary was also the centre of investigations from regulators in

several countries after information about alleged tax evasion was leaked by an IT

worker at the bank. In June 2015, HSBC agreed to pay a fine of GBP28mn to Swiss

regulators for allowing money laundering to take place at its subsidiary there, but US,

French, and Belgian authorities continued to probe the bank.

Also in June 2015, the bank announced that it would be cutting 25,000 more jobs -

including up to 8,000 in the UK, as it reorganises its business to focus more on Asian

markets. The shake up includes offloading the bank's units in Brazil and Turkey, with

the former deal being completed in a USD5.2bn sale to Banco Bradesco. The bank is

also allegedly weighing moving its headquarters to Hong Kong.

Corporate

Highlights HSBC Bank plc reported profit before tax of GBP2,136mn in H115, up 12.3% y-o-y

compared to GBP1,902mn in the first half of 2014. Net interest income rose by

GBP263mn to GBP3,504mn, while operating expenses climbed 16.7% y-o-y to

GBP4,727mn due largely to legal settlements and provisions. After tax profit for the

period came in at GBP1,546mn, up slightly from GBP1,519mn a year earlier.

The bank's consolidated total assets as of June 2015 were GBP749.9bn, a decrease of

5.9% compared to GBP797.3bn at end-December 2014. Loans and advances to

customers fell by 3.6% y-o-y to GBP248.0bn at end-H115, while customer deposits

were down 2.7% to GBP337.0bn over the same period.

The bank's CET1 ratio increased from 8.7% at end-2014 to 9.3% at end-June 2015,

while the total capital ratio rose from 14.1% to 14.3%.

United Kingdom Commercial Banking Report Q1 2017

HSBC Bank plc, along with other British banks, suffered several ratings downgrades in

2012. In June 2015, Standard & Poor's affirmed the long-term rating at 'AA-', the same

as Fitch. The bank has a rating of 'Aa2' at Moody's.

In June 2014, HSBC announced that it would be reducing the number of countries

catered to by its private bank by almost 50%, following the sale of a portfolio of Swiss

banking assets. HSBC's private bank served customers in about 150 countries but now

the number of countries is being reduced to around 70. A majority of the cut will be

achieved through a deal to sell USD12.5bn of its Swiss private banking assets to

Liechtenstein's bank LGT Group Foundation. The deal is subject to regulatory and other

approvals and is expected to be completed in Q414. The reformation of the private

bank is part of a wider group strategy.

Company Data Website:

■ www.hsbc.com

Media Contact:

■ Tel: 44-0-20-7992-1554 ■ Email: [email protected]

Table: Stock Market Indicators

2009 2010 2011 2012 2013 2014 2015 08-Mar-2016

Market Capitalisation GBP 123,389 115,153 87,741 119,520 124,729 116,950 105,550 122,915

Market Capitalisation USD 199,249 179,535 136,077 194,124 206,626 182,221 155,518 150,546

Share Price GBP 708.80 651.10 491.05 646.90 662.40 608.60 536.20 617.00

Share Price USD 11.45 10.15 7.62 10.51 10.97 9.48 7.90 7.56

Share Price USD, % change (eop) 36.1 -11.3 -25.0 38.0 4.4 -13.6 -16.7 na

Change, year-to-date na na na na na na na na

Shares Outstanding (mn) 17,410 17,686 17,868 18,476 18,830 19,218 19,685 na

na = not available/applicable. Source: HSBC Bank, Bloomberg

United Kingdom Commercial Banking Report Q1 2017

Table: Balance Sheet (GBPmn)

2008 2009 2010 2011 2012 2013 2014 2015

Total Assets 2,527,465 2,364,452 2,454,689 2,555,579 2,692,538 2,671,318 2,634,139 2,409,656

Loans & Mortgages 932,868 896,231 958,366 940,429 997,623 1,080,304 974,660 924,454

Total Deposits 1,115,327 1,159,034 1,227,725 1,253,925 1,340,014 1,482,812 1,350,642 1,289,586

Total Shareholders' Equity 100,229 135,661 154,915 166,093 183,129 190,459 199,978 197,518

Earnings per share (GBP) 0.41 0.34 0.73 0.92 0.74 0.84 0.69 0.65

Enter table source

Table: Balance Sheet (USDmn)

2008 2009 2010 2011 2012 2013 2014 2015

Total Assets 2,527,465 2,364,452 2,454,689 2,555,579 2,692,538 2,671,318 2,634,139 2,409,656

Loans & Mortgages 932,868 896,231 958,366 940,429 997,623 1,080,304 974,660 924,454

Total Deposits 1,115,327 1,159,034 1,227,725 1,253,925 1,340,014 1,482,812 1,350,642 1,289,586

Total Shareholders' Equity 100,229 135,661 154,915 166,093 183,129 190,459 199,978 197,518

Earnings per share (USD) 0.41 0.34 0.73 0.92 0.74 0.84 0.69 0.65

Source: HSBC Bank, Bloomberg

Table: Key Ratios (%)

2008 2009 2010 2011 2012 2013 2014 2015

Return on Assets 0.2 0.2 0.5 0.7 0.5 0.6 0.5 0.5

Return on Equities 5.1 5.1 9.2 10.6 8.1 8.8 7.0 6.6

Loan Deposit Ratio 85.8 79.5 79.7 76.4 75.7 73.9 73.1 72.4

Loan Asset Ratio 37.9 39.0 39.9 37.5 37.6 41.0 37.5 38.8

Equity Asset Ratio 3.6 5.4 6.0 6.2 6.5 6.8 7.2 7.8

Total Risk Based Capital Ratio 11.4 13.7 15.2 14.1 16.1 14.9 15.6 17.2

Tier 1 Capital Ratio 8.3 10.8 12.1 11.5 13.4 12.0 12.5 13.9

Source: HSBC Bank, Bloomberg

United Kingdom Commercial Banking Report Q1 2017

Lloyds Banking Group

SWOT Analysis

Strengths ■ Market leader in the UK's retail sector.

■ Well capitalised.

Weaknesses ■ The group is forced to make a series of substantial divestments by the EU as a result

of accepting state help during the financial crisis.

■ The group is among the banks caught up in the Libor fixing scandal.

■ Continuing the sale of the required branches under 'Project Verde'.

■ Plans to cut jobs and branch numbers before 2017.

Opportunities ■ The group has started scaling back the government's stake.

■ Total costs remained flat in H115.

■ Raising lending to SME sector.

■ Rise in net profit in H115.

Threats ■ Costs and risks associated with tighter regulatory environment.

■ Hit by subpoenas related to mounting global investigations over bank manipulation of

benchmark interest rates.

■ Negative publicity from the recent LIBOR fixing scandal.

Company Overview Lloyds TSB Bank was renamed Lloyds Banking Group in January 2009 following its

acquisition of HBOS. Its brands include the Bank of Scotland, Halifax, Scottish Widows,

and Lloyds Bank. It has operations in retail and commercial banking, insurance, and

consumer finance, and is quoted on both the London Stock Exchange and New York

Stock Exchange.

Having taken capital injections from the British government as part of the bailout

package, Lloyds has come under considerable scrutiny from domestic and European

regulators. In April 2011 the Independent Commission on Banking recommended the

group should sell substantially more than the assets already suggested to encourage

United Kingdom Commercial Banking Report Q1 2017

competition, though this was later toned down. However, the EU forced Lloyds to split

off and rebrand TSB, 20 years after it merged. The rebranding of TSB's 630 branches

began in September 2013, though after a failed effort to sell to the Co-op Bank. On 20

June 2014, TSB completed a successful IPO on the London Stock Exchange; as such it

no longer remains as part of the Lloyds Banking Group.

As part of its ongoing effort to offload non-core business assets and focus on the UK

market, in December 2013, the bank sold its remaining shares in Wealth Management

specialist St. James' Place for around GBP680mn.

In 2013, the government began the re-privatisation of the bank. In September 2013 it

sold a 6% stake, and in March 2014 announced it would offload another 7.5%, taking

its overall holdings down to 25%. From December 2014 the government began

gradually selling shares in the market, and in October 2015, the Treasury announced

that it plans to sell its remaining 12% stake, with the estimated GBP2bn offering to be

open to members of the public.

Lloyds is one of the UK banks involved in the Libor-fixing scandal, and in March 2014

became one of 16 major banks named in a lawsuit filed by the US Federal Deposit

Insurance Corporation (FDIC) in New York. In July 2014, the bank was fined GBP219mn

over the scandal. The bank was then hit with another GBP117mn fine in June 2015 for

mishandling payment protection insurance (PPI) complaints.

In October 2014, the bank disclosed plans to cut 9,000 jobs and close 200 branches by

2017. The decision forms part of the lender's new three-year strategy aimed at

generating annual savings of GBP1bn by 2017. The latest job cuts represent around

10% of the lender's workforce and the 200 branch closures equate to 6% of Lloyds'

network of 2,253 branches. However, Lloyds plans to set up 50 new branches, bringing

the net closure figure to 150. The job cuts come as the lender seeks to digitise its

business, automate more of its processes and reduce the requirement for a back-office

workforce, according to CEO Antonio Horta-Osorio.

Corporate

Highlights The banking group's underlying profit increased 15% y-o-y in H115 to GBP4.4b, from

GBP2,565mn in 2012. This outturn was supported by a 6% increase in net interest

income to GBP5,715mn, while operating costs remained flat at GBP4,150mn. There

was also a significant 75% y-o-y fall in provisions for loan losses.

The bank reported that loans and advances fell by 6.3% to reach GBP452.4bn at end-

June 2015, compared to GBP482.7bn at the end of 2014. Meanwhile customer deposits

were down by 6.8% to GBP416.6bn in the same period, and total assets decreased by

3.8% to GBP822.8bn as of June 30 2015.

The bank's full-loaded CRDIV common equity tier 1 ratio increased to 13.3% at end-

H115, compared to 12.8% at end-2014. Over the same period its core tier 1 ratio

increased from 12.0% to 14.0%, while total capital ratio dropped slightly from 22.0% to

United Kingdom Commercial Banking Report Q1 2017

21.7% over the same period. Meanwhile, gross impaired loans as a proportion of total

loans fell to 2.7% in June 2015 from 2.9% at end-2014 and 6.3% at the close of 2013.

Lloyds Banking Group, like several British banks, has suffered a series of downgrades

in recent years. As of September 2015, the group had a long-term rating of 'BBB+' at

Standard & Poor's, A+ at Fitch, and 'Baa1' at Moody's.

Company Data Website:

■ www.lloydsbankinggroup.com

Media Contact:

■ Leigh Calder ■ Tel: 44-0-20-7356-1347 ■ Email: [email protected]

Table: Stock Market Indicators

2009 2010 2011 2012 2013 2014 2015 08-Mar-2016

Market Capitalisation GBP 32,367 44,778 17,825 33,744 56,359 54,177 52,212 37,607

Market Capitalisation USD 52,267 69,813 27,644 54,806 93,365 84,413 76,929 46,049

Share Price GBP 50.69 65.70 25.91 47.92 78.88 75.82 73.07 52.63

Share Price USD 0.82 1.02 0.40 0.78 1.31 1.18 1.08 0.64

Share Price USD, % change (eop) -10.2 25.1 -60.8 93.7 67.9 -9.6 -8.9 na

Change, year-to-date na na na na na na na na

Shares Outstanding (mn) 63,855 68,155 68,808 70,424 71,449 71,455 71,455 na

na = not available/applicable. Source: Lloyds TSB Banking Group, Bloomberg

Table: Balance Sheet (GBPmn)

2008 2009 2010 2011 2012 2013 2014 2015

Total Assets 436,033 1,027,255 991,574 970,546 934,221 847,030 854,896 806,688

Loans & Mortgages 240,344 626,969 592,597 565,638 517,225 495,281 482,704 455,175

Total Deposits 170,938 406,741 393,633 413,906 426,912 441,311 447,067 418,326

Total Shareholders' Equity 9,699 44,107 46,902 46,594 42,581 39,336 49,903 46,980

Earnings per share (GBP) 0.03 0.08 -0.01 -0.04 -0.02 -0.01 0.02 0.01

Source: Lloyds TSB Banking Group, Bloomberg

United Kingdom Commercial Banking Report Q1 2017

Table: Balance Sheet (USDmn)

2008 2009 2010 2011 2012 2013 2014 2015

Total Assets 635,518 1,658,811 1,545,963 1,505,220 1,517,362 1,403,190 1,332,013 1,188,574

Loans & Mortgages 350,301 1,012,430 923,918 877,248 840,077 820,483 752,101 670,655

Total Deposits 249,142 656,805 613,713 641,927 693,390 731,076 696,575 616,362

Total Shareholders' Equity 14,136 71,224 73,125 72,263 69,160 65,164 77,754 69,220

Earnings per share (USD) 0.06 0.12 -0.01 -0.07 -0.03 -0.02 0.03 0.01

Source: Lloyds TSB Banking Group, Bloomberg

Table: Key Ratios (%)

2008 2009 2010 2011 2012 2013 2014 2015

Return on Assets 0.2 0.4 0.0 -0.3 -0.2 -0.1 0.2 0.1

Return on Equities 7.2 10.7 -0.7 -6.1 -3.4 -2.1 3.4 1.1

Loan Deposit Ratio 142.6 157.8 155.2 141.2 124.7 114.9 109.4 109.5

Loan Asset Ratio 55.9 62.5 61.6 60.2 57.0 59.9 57.2 56.8

Equity Asset Ratio 2.2 4.2 4.6 4.7 4.5 4.6 5.1 5.1

Total Risk Based Capital Ratio 11.2 12.4 15.2 15.6 17.3 20.8 22.0 21.5

Tier 1 Capital Ratio 8.0 9.6 11.6 12.5 13.8 14.5 16.5 16.4

na = not available. Source: Lloyds Banking Group, Bloomberg

United Kingdom Commercial Banking Report Q1 2017

Royal Bank of Scotland

SWOT Analysis

Strengths ■ Healthy capitalisation as a result of government ownership.

■ Funding support from UK government.

• Established global footprint.

Weaknesses ■ Large divestments have been required of the group as a result of accepting state

funds and government ownership.

■ A return to net loss in H115.

■ Assets have shrunk rapidly since 2013.

Opportunities ■ Improved capital ratios.

■ Widespread sales of new core assets will set bank on more solid ground for future

growth.

■ EU approval clears way for re privatisation.

■ Divested several non-performing assets.

Threats ■ The bank is still losing money, several years after the financial crisis began.

■ Reputation battered amid multiple fines, scandals, with more pending.

■ Plans to cut more than 20,000 jobs in the next few years.

Company Overview The Royal Bank of Scotland (RBS) Group was established in 1727 and includes the

brands RBS, NatWest, Coutts, Lombard, and Ulster Bank. The bank boasts over 17mn

customers in the UK, including over 16mn retail customers, and around 2,000 branches

and offices. It operates in the retail and commercial, corporate, and personal banking

sectors.

Following a loss of GBP24.1bn (USD36.9bn) in 2008, the largest in UK corporate

history, RBS in 2009 transferred GBP325.0bn of impaired assets to a special vehicle set

up by the Treasury. RBS, already 81% owned by the government has, like Lloyds, been

the focus of British and European regulatory attention. RBS agreed to new terms under

United Kingdom Commercial Banking Report Q1 2017

the UK government's Asset Protection Scheme in November 2009, which gave the

group insulation against 'extreme stress scenarios' and a strong capital position, the

bank said.

After a month of discussions, it was revealed in February 2010 that RBS was to sell the

non-US assets of its commodities trading firm RBS Sempra to US bank JPMorgan

Chase. The USD1.7bn deal, which received EU approval in June 2010, saw RBS

Sempra's European operations pass to the American bank. Meanwhile, RBS sold two

Hilton properties in 2011, the Hilton Grosvenor in a GBP9.5mn deal and the Hilton

Glasgow for GBP35.7mn, in keeping with the scheme of 'reducing exposure to certain

assets' at the heart of the process to re-establish RBS as a lucrative bank.

The sell-off of assets continued: in its annual report for 2013, the bank outlined the

sales of businesses, including Direct Line Group, Worldpay, and Aviation Capital, as

well as the withdrawal from 26 countries as part of a strategy to 'rationalise' its

geographical footprint and focus on its core business in the UK market.

The bank announced in April 2014 that it was considering plans to close around 44

bank branches throughout the UK under its cost cutting drive. The lender has shut

down nearly 60 offices since 2008. RBS has witnessed a 30% fall in branch

transactions since 2010 owing to significant changes in banking over the past few

years. The bank also plans to cut more than 20,000 jobs in the next few years as part of

CEO Ross McEwan's Project Cook strategy to curtail rising operational expenses and

boost the lender's balance sheet. Since 2008, the group global workforce has been cut

from nearly 200,000, to around 110,000.

Another key recent sale is of RBS' US retail arm, Citizens. In July 2015, the bank

confirmed that it had offloaded USD2.2bn in shares, leaving RBS with a 23.4% stake. A

few months earlier it also sold the overseas arm of its private banking division, Coutts

International, to Switzerland's UBP. Meanwhile, in August 2015 the government began

cutting its own 79% stake in the bank with a GBP2bn (5.2% stake) share sale.

However, the bank is still dealing with a number of setbacks. In 2013, RBS was fined

over GBP700mn by UK, EU and US authorities for its role in the LIBOR fixing scandal

that has tarnished several leading banks. RBS is also among the 16 banks being sued

in the US for damage caused to local lenders by the interest rate manipulation. In

addition, RBS may have to fork out up to GBP1bn in compensation payments and

software upgrades after an IT glitch left customers unable to access money on the busy

'Cyber Monday' shopping day. The bank is expected to be hit with an even bigger fine

from US regulators over mis-selling of mortgage securities in the run up to the financial

crisis

United Kingdom Commercial Banking Report Q1 2017

Corporate

Highlights Despite enjoying government support, RBS continues to struggle. The bank reported

net loss attributable to shareholders of GBP153mn the first half of 2015, a reversal from

the GBP1,425mn profit registered in H114. The bank saw litigation costs rise from

GBP250mn in H114 to GBP1,315mn in H115, while restructuring costs tripled to

GBP1,503mn.

The bank's total consolidated assets shrunk by 21.7% to GBP964.7bn at end H115,

from GBP1,050.8bn at the end of 2014. Net loans and advances fell by GBP19.3bn to

GBP315.0bn over the same period, while customer deposits were down GBP12.2bn to

GBP342.0bn.

On a fully-loaded Basel III compliant basis, the common equity Tier 1 ratio stood at

12.3% at end-H115, up from 11.2% six months earlier. The bank is aiming to raise this

to 13% by end-2015, and above 12% in the medium term.

In light of its ongoing financial difficulties, RBS group has seen its long-term credit

rating cut by all the main agencies. In the latest moves in H115, Moody's downgraded

the bank from 'Baa2' to 'Ba1', while Fitch cut its rating from 'A' to 'BBB+'. Meanwhile,

Standard & Poor's affirmed the group's 'BBB-' rating.

Company Data Website:

■ www.rbs.com

Media Contact:

■ Tel: 44-131-525-0382 ■ Email: [email protected]

Table: Stock Market Indicators

2009 2010 2011 2012 2013 2014 2015 08-Mar-2016

Market Capitalisation GBP 31,352 42,765 22,244 36,249 38,216 45,221 35,106 20,884

Market Capitalisation USD 50,627 66,675 34,498 58,876 63,308 70,460 51,725 25,573

Share Price GBP 292.00 390.70 201.80 324.50 338.10 394.40 302.00 177.10

Share Price USD 4.72 6.09 3.13 5.27 5.60 6.15 4.45 2.17

Share Price USD, % change (eop) -34.5 29.2 -48.6 68.4 6.3 9.7 -27.6 na

Change, year-to-date na na na na na na na na

Shares Outstanding (mn) 10,737 10,946 11,023 11,256 11,196 11,356 11,625 na

na = not available/applicable. Source: Royal Bank of Scotland , Bloomberg

United Kingdom Commercial Banking Report Q1 2017

Table: Balance Sheet (GBPmn)

2008 2009 2010 2011 2012 2013 2014 2015

Total Assets 2,401,652 1,696,486 1,453,576 1,506,867 1,312,295 1,027,878 1,051,019 815,408

Loans & Mortgages 835,409 687,353 502,748 454,112 430,088 390,825 334,251 306,334

Total Deposits 581,369 545,849 428,599 414,143 433,239 414,396 354,288 343,186

Total Shareholders' Equity 80,498 94,631 76,851 76,053 70,448 59,215 58,709 54,147

Earnings per share (GBP) -14.62 -0.63 -0.05 -0.18 -0.55 -0.80 -0.31 -0.17

Source: Royal Bank of Scotland, Bloomberg

Table: Balance Sheet (USDmn)

2008 2009 2010 2011 2012 2013 2014 2015

Total Assets 3,500,408 2,739,486 2,266,270 2,337,000 2,131,430 1,702,783 1,637,593 1,201,422

Loans & Mortgages 1,217,609 1,109,938 783,834 704,282 698,549 647,441 520,796 451,353

Total Deposits 847,345 881,437 668,229 642,294 703,667 686,488 552,016 505,650

Total Shareholders' Equity 117,326 152,810 119,818 117,951 114,422 98,096 91,474 79,780

Earnings per share (USD) -27.07 -0.99 -0.08 -0.29 -0.87 -1.26 -0.50 -0.26

Source: Royal Bank of Scotland, Bloomberg

Table: Key Ratios (%)

2008 2009 2010 2011 2012 2013 2014 2015

Return on Assets -1.1 -0.1 -0.1 -0.1 -0.4 -0.7 -0.3 -0.2

Return on Equities -43.4 -5.3 -1.5 -2.7 -8.4 -14.1 -6.1 -3.6

Loan Deposit Ratio 145.6 129.1 121.5 114.4 104.2 100.4 99.3 91.3

Loan Asset Ratio 35.2 41.5 35.8 31.4 34.4 40.5 33.5 38.4

Equity Asset Ratio 2.5 4.6 5.2 5.0 5.2 5.7 5.3 6.6

Total Risk Based Capital Ratio 14.1 16.1 14.0 13.8 14.5 16.5 17.1 24.7

Tier 1 Capital Ratio 10.0 14.1 12.9 13.0 12.4 13.1 13.2 19.1

Source: Royal Bank of Scotland, Bloomberg

United Kingdom Commercial Banking Report Q1 2017

Santander

SWOT Analysis

Strengths ■ The UK is a long-established, well-respected global financial centre.

■ Parent owner is industry giant Santander.

Weaknesses ■ Slight fall in capital ratios in H115.

■ Parent group not prioritising public listing of Santander UK

Opportunities ■ In the long term, UK banks will be well placed to increase their lending.

■ Robust growth in net profits in H115

Threats ■ Uncertainty in the UK banking sector, and risk of destabilisation as a result of the debt

crisis in the eurozone.

■ Increasingly strict regulatory environment.

Company Overview Santander entered the UK market in 2004, and expanded via three major acquisitions:

Abbey National in November 2004, Bradford & Bingly's retail branches and savings

business in September 2008, and Alliance & Leicester in January 2009. In 2010, all of

the acquired businesses were rebranded as Santander.

At the end of June 2015, Santander UK PLC had 840 branches, over 20,000 staff, and

served over 14mn active customers.

Santander UK PLC has divisions in retail banking, commercial banking, markets, and its

corporate centre. In March 2013, it closed down its UK investment advice division, and

a year later was hit with a GBP12.4mn fine by the Financial Conduct Authority for

providing 'unsuitable' investment advice to customers. In February 2015, the bank

revealed that it was expecting up to GBP50mn in further fines in the year.

Santander Group was founded in 1857 in Spain, and is the largest bank in the eurozone

by market capitalisation (EUR88.0bn at end-2014). It serves 117mn customers, over

185,000 employees, and 12,951 branches worldwide.

In September 2015, the parent group said that it would not prioritise listing its UK

subsidiary as it seeks to boost capital ratios.

United Kingdom Commercial Banking Report Q1 2017

Corporate

Highlights Net interest income rose by 7% in H115 to reach GBP1,783mn, from GBP1,673 in the

first half of 2014. Total operating expenses fell by 2% from GBP1,223mn to

GBP1,201mn over the same period, while impairment losses came in at around a third

of the total in H114. Profit before tax jumped from GBP545mn in H114 to GBP928mn in

H115, while profit after tax climbed 67.4% y-o-y to GBP733mn.

On the balance sheet, customer loans increased by 2.9% to reach GBP196.2bn at end-

H115, compared to GBP190.7bn at the close of 2014. Meanwhile deposits rose by

3.1% y-o-y to GBP157.1bn during the same period and total assets inched up from

GBP276.0bn at end-2014 to GBP277.2bn six months later.

The bank's CET1 ratio rose to 11.7% in H115, down slightly from 11.9% at the close of

2014. The non-performing loan (NPL) ratio fell from 1.8% in 2014 to 1.7% at end-June

2015.

Santander UK currently holds a long-term credit rating of A by Standard & Poor's and

Fitch, and A1 by Moody's.

Company Data Website:

■ www.santander.co.uk

Table: Stock Market Indicators

2009 2010 2011 2012 2013 2014 2015 08-Mar-2016

Market Capitalisation GBP 9,492 9,492 9,492 9,492 9,492 9,492 9,492 9,492

Market Capitalisation USD 17,629 17,629 17,629 17,629 17,629 17,629 17,629 17,629

Share Price GBP 643.50 643.50 643.50 643.50 643.50 643.50 643.50 643.50

Share Price USD 11.95 11.95 11.95 11.95 11.95 11.95 11.95 11.95

Share Price USD, % change (eop) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 na

Change, year-to-date na na na na na na na na

Shares Outstanding (mn) 24,120 31,052 31,052 31,052 31,052 31,052 31,052 na

na = not available/applicable. Source: Santander, Bloomberg

United Kingdom Commercial Banking Report Q1 2017

Table: Balance Sheet (GBPmn)

2008 2009 2010 2011 2012 2013 2014 2015

Total Assets 297,310 285,291 302,860 297,574 293,044 270,286 275,977 281,406

Loans & Mortgages 180,176 186,804 195,132 201,069 191,907 184,587 188,691 198,045

Total Deposits 130,245 143,893 152,643 147,924 148,131 147,167 153,606 164,074

Total Shareholders' Equity 6,697 7,222 12,274 12,666 12,949 12,590 14,193 15,659

Earnings per share (GBP) 0.07 0.05 0.05 0.03 0.03 0.03 0.04 0.03

Source: Santander, Bloomberg

Table: Balance Sheet (USDmn)

2008 2009 2010 2011 2012 2013 2014 2015

Total Assets 433,329 460,688 472,189 461,508 475,962 447,756 430,000 414,624

Loans & Mortgages 262,607 301,651 304,230 311,838 311,695 305,787 293,999 291,800

Total Deposits 189,832 232,358 237,986 229,415 240,594 243,797 239,334 241,747

Total Shareholders' Equity 9,761 11,662 19,136 19,644 21,032 20,857 22,114 23,072

Earnings per share (USD) 0.13 0.08 0.08 0.05 0.05 0.04 0.06 0.05

Source: Santander, Bloomberg

Table: Key Ratios (%)

2008 2009 2010 2011 2012 2013 2014 2015

Return on Assets 0.3 0.4 0.5 0.3 0.3 0.3 0.4 0.3

Return on Equities 17.4 19.1 16.7 7.4 7.5 7.1 8.4 6.3

Loan Deposit Ratio 139.1 130.7 128.9 137.0 130.8 126.5 123.8 121.4

Loan Asset Ratio 60.9 65.9 65.0 68.1 66.1 68.9 68.9 70.8

Equity Asset Ratio 2.0 2.3 4.0 4.2 4.3 4.5 5.1 5.5

Total Risk Based Capital Ratio 14.0 17.6 20.6 20.6 18.2 17.1 17.9 18.2

Tier 1 Capital Ratio 8.5 9.5 14.8 14.8 14.6 13.2 14.1 14.3

na = not available. Source: Santander, Bloomberg

United Kingdom Commercial Banking Report Q1 2017

Global Industry Overview

Global Commercial Banking Outlook

■ Developed market tail risks predominate, particularly in Europe

■ Most emerging market banking sectors to see improved prospects in 2017

■ Key exceptions include Saudi Arabia, Russia and Turkey

■ BMI introduces new non-performing loan data series this quarter

The global banking sector in 2017 will be characterised by divergence in loan and asset growth. In general,

emerging market banking sectors will see a marked improvement in loan growth and asset quality in 2017

compared with the previous three years, alongside an ameliorating macroeconomic backdrop and a modest

rebound in commodity prices. There are some notable exceptions, in countries experiencing slow recoveries

from crises, including Russia and Brazil, and other countries where the macroeconomic environment and

asset quality are deteriorating, such as China. The biggest global event risks arguably come from developed

Europe, where there are several pressure points that could trigger a crisis in the coming year, including the

weak condition of German giant Deutsche Bank. The US banking sector stands apart in terms of developed

market loan growth, with well-capitalised banks and a relatively solid outlook for private sector borrowing

demand, but tightening regulation and monetary policy pose risks.

New Non-Performing Loan Data Series

This quarter, BMI has added data on non-performing loans (NPLs) to our commercial banking databases

and reports. We now have NPL data online for 86 countries which will be updated quarterly, in line with

our normal commercial banking reports. Our NPL data is based on the International Monetary Fund

definition of all loans on which repayments of either interest or principal are overdue by 90 days or more.

The data we have collected is for the total financial sector, covering the total lending from the banking

sector within each particular country. The data is published, where available, on a monthly as well as an

annual basis, and is available as a percentage of all loans and in value terms in local currency, dollars and

euros.

We incorporate NPL data into our country-by-country banking sector analysis, as it offers a key indication

as to the health of a financial sector as well as the wider economy. The highest NPL ratios belong to

distressed eurozone countries that have seen severe banking crises in the past five years, including Greece,

Portugal and Cyprus; additionally, countries that have endured more idiosyncratic crises, such as Ukraine,

have very high NPL levels (see chart). On the other end of the scale are developed countries such as the US.

United Kingdom Commercial Banking Report Q1 2017

Problems Are Polarised

End-2015 Non-Performing Loan Ratios (%) G

re e

C yp

ru s

U kr

a in

It a ly

Ir e la

n d

P o rt

u g a

In d

E u

ro zo

n e

S p

a in

B ra

zi l

S o

u th

A fr

ic a

U n ite

d K

in g d

o m

G e

rm a n y

C h in

U n ite

d S

ta te

Ja p

a n

C a

n a

d a

A u

st ra

lia

Source: National sources, BMI

While the official data usually gives an accurate picture as to the general state of asset quality in a country,

sometimes our analysts need to overlay the official data with additional scrutiny of the state of the banking

sector to get a sense of the true risk. China is a good case in point, where the headline figure understates

risk, in our view. The headline NPL ratio reported by the China Banking Regulatory Commission has risen

to a multi-year high of 1.8% as of Q216 (from a low of 0.9% in Q309), but as we have previously asserted,

this figure is highly understated (see 'Banks Teetering On The Brink Of A Potential Bailout', 10 August

2016). Chinese banks manage their reported NPL ratios closely and have extended the amount of time that a

loan can be overdue before they classify it as bad, particularly for state-owned enterprises. The 'at-risk'

credit ratio in China could be around 20%, and if more stringent criteria were to be applied, the figure could

be estimated to be as high as 30%. In addition to this, the NPL data give us historic trends over time, rather

than an outlook. Therefore, while the NPL data is useful to see trends over time, our accompanying analysis

is intended to provide a holistic view on the risks inherent in the national banking sectors in our universe of

coverage.

United Kingdom Commercial Banking Report Q1 2017

Regional Outlooks

Developed States: Although the eurozone banking sector is showing continued signs of progress following

the crises of the past decade, massive systemic risks lie in wait in late 2016 and 2017. These include the

precarious position of Germany's Deutsche Bank, a slow burning but dangerous non-performing loan

burden in Italy, the Portuguese banking sector's vulnerability to the sovereign losing its investment grade

rating, and the potential for the European Central Bank to tighten policy prematurely. In the US, the

regulatory landscape is likely to become more stringent under a Hillary Clinton presidency following the

November 2016 elections, with the biggest burdens continuing to fall on large banks. While this is largely

factored into our loan growth forecasts for the US commercial banking system as a whole, further changes

in the regulatory regime could point to further upside for smaller versus larger banks, and potentially more

consolidation among banks at the lower end of the asset scale.

Slow Recovery, With Major Risks

Eurozone - Bank Loans To Households and Non-Financial Corporations

Client loans, % y-o-y (RHS) Client loans, % of GDP (LHS)

2 0 0

2 0

0 9

2 0

1 0

2 0

1 1

2 0

1 2

2 0

1 3

2 0 1

2 0

1 6

2 0

1 7

2 0

1 8

2 0

1 9

2 0

160

170

180

190

200

-5

-10

f=BMI forecast. Source: ECB,BMI

Asia: Banks in China, Australia, and New Zealand have large exposure to property markets, and we believe

that this poses downside risks to loan growth and financial stability. Residential real estate prices in all of

these markets are elevated, and carry the potential for significant downturns. Policymakers in these

United Kingdom Commercial Banking Report Q1 2017

countries are already aware of these risks, and we expect them to continue to enact measures to cool

property prices, and strengthen their financial systems. Most notably, we believe that China's residential

housing market, particularly in Tier-1 and Tier-2 cities, is overheating due to surging credit. Household

loans (mostly mortgages) as a share of total new yuan-denominated loans have been on an uptrend since

2007, and accounted for 45.7% of the total in the first eight months in 2016. Chinese property firms and

banks are exposed to substantial credit and liquidity risks, which would result in weakening of asset quality,

in the event of a sharp price correction.

Chinese Banks Have Increasing Exposure To Real Estate

China - Big Five State-Owned Banks' Overall Real Estate Loans, % Of Overall Loans

Source: BMI, Annual Reports

Note: Figures are average of Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Agricultural Bank of China

(ABC), Bank of China (BOC), and Bank of Communications (BoComm)

Emerging Europe: The banking sectors of emerging Europe face divergent growth outlooks over the

coming years, each characterised by distinct phases of the deleveraging cycle. Private sector deleveraging is

running its course across many economies including Bulgaria, Romania, Hungary and Serbia, with bank

lending poised for gradual recovery. Sluggish recovery from recession will keep banking sector growth

prospects dim in Russia, Kazakhstan and Ukraine, while Turkey is in the early stages of a prolonged

United Kingdom Commercial Banking Report Q1 2017

deleveraging process. Central Europe will be an outperformer in terms of credit growth, although

profitability will be constrained by policy changes and ultra-low interest rates.

Deleveraging Running Its Course In Southeastern Europe

Client Loans, % of GDP

Bulgaria Romania Serbia

2 0

0 6

2 0

0 7

2 0 0

2 0

0 9

2 0 1

2 0

1 1

2 0

1 2

2 0 1

2 0

1 5

2 0

1 6

2 0

1 7

2 0

1 8

f = BMI forecast. Source: National sources, BMI

Latin America: Latin American banks will broadly see stronger asset growth in 2017, in line with an

expected rebound in economic activity. Over 2016, slowing economic growth and elevated interest rates

have undermined loan demand, while high inflation has hurt asset quality and sector profitability. Over the

coming year, higher average commodity prices and a move toward more orthodox macroeconomic policies

will drive accelerating economic growth, which will underpin more robust loan demand. Additionally,

decelerating inflation will bolster sector profitability and allow interest rates to fall in key economies,

offering tailwinds to loan demand. Argentina and Peru are best positioned for robust growth. Mexico and

Brazil face near-term headwinds, including sluggish economic activity, which will weigh on asset growth.

United Kingdom Commercial Banking Report Q1 2017

Growth Rates Vary Across Latin America

Latin America (Selected) - Client Loan Growth, %

Argentina Brazil Chile Colombia Mexico Peru

2014 2015 2016f 2017f 2018f 2019f 2020f

f=BMI forecast. Source: Respective central banks, BMI

Middle East and North Africa: In 2017, we expect the operating environment to improve for commercial

banks in all of the Gulf Cooperation Council (GCC), apart from Saudi Arabia. The recovery will be gradual,

and we believe that there is no going back to the boom years of 2007-2014, when oil prices averaged almost

double what we forecast for the coming years. Amid tightening liquidity and a riskier economic backdrop,

banks will favour safer government debt over riskier private sector lending. As the Saudi Arabian

government pushes ahead with austerity, we see real GDP growth decelerating. In this context, Saudi banks

will continue to struggle finding new lending opportunities to the private sector, and asset growth will slow.

United Kingdom Commercial Banking Report Q1 2017

Slowdown Is Over For Most GCC Banking Sectors, But Not For Saudi Arabia

GCC - Real GDP Growth (LHS), And Commercial Banks Asset Growth (RHS), % y-o-y

f = BMI forecast. Source: UN, National sources, BMI

Sub-Saharan Africa: Average loan growth will be noticeably slower across Sub-Saharan Africa (SSA) over the next five years compared to the last decade. In the region's commodity plays such as oil producing Nigeria and copper producing Zambia, more challenging economic conditions will weigh on job creation and cool business and consumer confidence, undermining demand for new credit. Infrastructure-driven Kenya, Tanzania and Uganda will also see more modest loan growth, though this is in large part due to low base effects. Strong real GDP growth and increased access to credit through mobile money platforms saw double-digit loan growth across these countries in the last decade. However, while these factors will continue to offer tailwinds to banking sector expansion, underpinning our outlook for still relatively robust loan growth across East Africa, we believe that the easiest gains have already occurred and further demand for credit will occur at a more even pace.

United Kingdom Commercial Banking Report Q1 2017

Demographic Forecast

Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model. Not only

is the total population of a country a key variable in consumer demand, but an understanding of

the demographic profile is essential to understanding issues ranging from future population trends to

productivity growth and government spending requirements.

The accompanying charts detail the population pyramid for 2015, the change in the structure of

the population between 2015 and 2050 and the total population between 1990 and 2050. The tables show

indicators from all of these charts, in addition to key metrics such as population ratios, the urban/rural split

and life expectancy.

Population

(1990-2050)

United Kingdom - Population, mn

1 9

9 0

2 0 0

2 0

1 0

2 0 1

5 f

2 0

2 5

2 0

3 0

2 0

3 5

2 0

4 0

2 0

4 5

2 0

5 0

100

f = BMI forecast. Sources: World Bank, UN, BMI

United Kingdom Commercial Banking Report Q1 2017

United Kingdom Population Pyramid

2015 (LHS) & 2015 Versus 2050 (RHS)

Source: World Bank, UN, BMI

Table: Population Headline Indicators (United Kingdom 1990-2025)

1990 2000 2005 2010 2015f 2020f 2025f

Population, total, '000 57,110 58,867 60,210 62,716 64,715 66,700 68,527

Population, % y-o-y na 0.4 0.6 0.8 0.6 0.6 0.5

Population, total, male, '000 27,750 28,677 29,474 30,813 31,898 32,956 33,924

Population, total, female, '000 29,359 30,189 30,735 31,903 32,817 33,744 34,602

Population ratio, male/female 0.95 0.95 0.96 0.97 0.97 0.98 0.98

na = not available; f = BMI forecast. Source: World Bank, UN, BMI

Table: Key Population Ratios (United Kingdom 1990-2025)

1990 2000 2005 2010 2015f 2020f 2025f

Active population, total, '000 37,291 38,336 39,748 41,474 41,719 42,208 42,801

Active population, % of total population 65.3 65.1 66.0 66.1 64.5 63.3 62.5

Dependent population, total, '000 19,818 20,530 20,461 21,242 22,996 24,491 25,725

Dependent ratio, % of total working age 53.1 53.6 51.5 51.2 55.1 58.0 60.1

United Kingdom Commercial Banking Report Q1 2017

Key Population Ratios (United Kingdom 1990-2025) - Continued

1990 2000 2005 2010 2015f 2020f 2025f

Youth population, total, '000 10,834 11,213 10,831 11,098 11,502 12,187 12,326

Youth population, % of total working age 29.1 29.3 27.3 26.8 27.6 28.9 28.8

Pensionable population, '000 8,984 9,317 9,629 10,144 11,493 12,304 13,398

Pensionable population, % of total working age 24.1 24.3 24.2 24.5 27.6 29.2 31.3

f = BMI forecast. Source: World Bank, UN, BMI

Table: Urban/Rural Population & Life Expectancy (United Kingdom 1990-2025)

1990 2000 2005 2010 2015f 2020f 2025f

Urban population, '000 44,625.8 46,299.5 48,116.8 50,989.9 53,450.1 55,866.0 58,113.1

Urban population, % of total 78.1 78.7 79.9 81.3 82.6 83.8 84.8

Rural population, '000 12,484.3 12,567.5 12,093.2 11,726.8 11,265.7 10,834.1 10,414.1

Rural population, % of total 21.9 21.3 20.1 18.7 17.4 16.2 15.2

Life expectancy at birth, male, years 72.7 75.2 76.8 78.0 78.9 79.9 80.8

Life expectancy at birth, female, years 78.3 80.0 81.2 82.1 82.7 83.4 84.0

Life expectancy at birth, average, years 75.6 77.7 79.0 80.1 80.8 81.6 82.4

f = BMI forecast. Source: World Bank, UN, BMI

Table: Population By Age Group (United Kingdom 1990-2025)

1990 2000 2005 2010 2015f 2020f 2025f

Population, 0-4 yrs, total, '000 3,823 3,551 3,451 3,953 4,057 4,115 4,094

Population, 5-9 yrs, total, '000 3,613 3,809 3,556 3,452 3,975 4,079 4,136

Population, 10-14 yrs, total, '000 3,397 3,853 3,823 3,691 3,469 3,992 4,095

Population, 15-19 yrs, total, '000 3,870 3,620 3,957 4,066 3,781 3,561 4,078

Population, 20-24 yrs, total, '000 4,562 3,502 3,903 4,282 4,227 3,944 3,715

Population, 25-29 yrs, total, '000 4,704 4,046 3,752 4,237 4,435 4,380 4,089

Population, 30-34 yrs, total, '000 4,020 4,644 4,166 3,955 4,347 4,546 4,485

Population, 35-39 yrs, total, '000 3,704 4,656 4,692 4,214 4,024 4,416 4,610

Population, 40-44 yrs, total, '000 4,111 4,016 4,651 4,721 4,246 4,060 4,448

Population, 45-49 yrs, total, '000 3,386 3,679 3,986 4,689 4,718 4,251 4,066

United Kingdom Commercial Banking Report Q1 2017

Population By Age Group (United Kingdom 1990-2025) - Continued

1990 2000 2005 2010 2015f 2020f 2025f

Population, 50-54 yrs, total, '000 3,087 4,011 3,612 3,957 4,650 4,684 4,226

Population, 55-59 yrs, total, '000 2,937 3,264 3,900 3,497 3,891 4,577 4,617

Population, 60-64 yrs, total, '000 2,905 2,893 3,125 3,851 3,395 3,786 4,463

Population, 65-69 yrs, total, '000 2,867 2,606 2,704 2,925 3,661 3,242 3,630

Population, 70-74 yrs, total, '000 2,182 2,341 2,337 2,425 2,691 3,390 3,023

Population, 75-79 yrs, total, '000 1,875 2,007 1,946 1,975 2,102 2,358 3,002

Population, 80-84 yrs, total, '000 1,234 1,256 1,476 1,419 1,536 1,662 1,896

Population, 85-89 yrs, total, '000 594 751 756 933 920 1,019 1,131

Population, 90-94 yrs, total, '000 188 285 324 356 455 463 530

Population, 95-99 yrs, total, '000 37 60 75 96 110 146 155

Population, 100+ yrs, total, '000 4 6 8 12 16 20 28

f = BMI forecast. Source: World Bank, UN, BMI

Table: Population By Age Group % (United Kingdom 1990-2025)

1990 2000 2005 2010 2015f 2020f 2025f

Population, 0-4 yrs, % total 6.69 6.03 5.73 6.30 6.27 6.17 5.98

Population, 5-9 yrs, % total 6.33 6.47 5.91 5.51 6.14 6.12 6.04

Population, 10-14 yrs, % total 5.95 6.55 6.35 5.89 5.36 5.99 5.98

Population, 15-19 yrs, % total 6.78 6.15 6.57 6.48 5.84 5.34 5.95

Population, 20-24 yrs, % total 7.99 5.95 6.48 6.83 6.53 5.91 5.42

Population, 25-29 yrs, % total 8.24 6.87 6.23 6.76 6.85 6.57 5.97

Population, 30-34 yrs, % total 7.04 7.89 6.92 6.31 6.72 6.82 6.55

Population, 35-39 yrs, % total 6.49 7.91 7.79 6.72 6.22 6.62 6.73

Population, 40-44 yrs, % total 7.20 6.82 7.73 7.53 6.56 6.09 6.49

Population, 45-49 yrs, % total 5.93 6.25 6.62 7.48 7.29 6.37 5.93

Population, 50-54 yrs, % total 5.41 6.81 6.00 6.31 7.19 7.02 6.17

Population, 55-59 yrs, % total 5.14 5.55 6.48 5.58 6.01 6.86 6.74

Population, 60-64 yrs, % total 5.09 4.91 5.19 6.14 5.25 5.68 6.51

Population, 65-69 yrs, % total 5.02 4.43 4.49 4.66 5.66 4.86 5.30

Population, 70-74 yrs, % total 3.82 3.98 3.88 3.87 4.16 5.08 4.41

Population, 75-79 yrs, % total 3.28 3.41 3.23 3.15 3.25 3.54 4.38

Population, 80-84 yrs, % total 2.16 2.14 2.45 2.26 2.37 2.49 2.77

United Kingdom Commercial Banking Report Q1 2017

Population By Age Group % (United Kingdom 1990-2025) - Continued

1990 2000 2005 2010 2015f 2020f 2025f

Population, 85-89 yrs, % total 1.04 1.28 1.26 1.49 1.42 1.53 1.65

Population, 90-94 yrs, % total 0.33 0.49 0.54 0.57 0.70 0.69 0.77

Population, 95-99 yrs, % total 0.07 0.10 0.12 0.15 0.17 0.22 0.23

Population, 100+ yrs, % total 0.01 0.01 0.01 0.02 0.03 0.03 0.04

f = BMI forecast. Source: World Bank, UN, BMI

United Kingdom Commercial Banking Report Q1 2017

Methodology

Industry Forecast Methodology

BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and

causal/econometric modelling. The precise form of model we use varies from industry to industry, in each

case being determined, as per standard practice, by the prevailing features of the industry data being

examined.

Common to our analysis of every industry is the use of vector autoregressions, which allow us to forecast a

variable using more than the variable's own history as explanatory information. For example, when

forecasting oil prices, we can include information about oil consumption, supply and capacity.

When forecasting for some of our industry sub-component variables, however, using a variable's own

history is often the most desirable method of analysis. Such single-variable analysis is called univariate

modelling. We use the most common and versatile form of univariate models: the autoregressive moving

average model (ARMA).

In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality

is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a basis for

analysis and forecasting.

We mainly use OLS estimators, and, in order to avoid relying on subjective views and encourage the use of

objective views, we use a 'general-to-specific' method. BMI mainly uses a linear model, but simple non-

linear models, such as the log-linear model, are used when necessary. During periods of 'industry shock', for

example poor weather conditions impeding agricultural output, dummy variables are used to determine the

level of impact.

Effective forecasting depends on appropriately selected regression models. BMI selects the best model

according to various different criteria and tests, including but not exclusive to:

■ R2 tests explanatory power; adjusted R2 takes degree of freedom into account;

■ Testing the directional movement and magnitude of coefficients;

■ Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value); and

■ All results are assessed to alleviate issues related to auto-correlation and multi-collinearity.

United Kingdom Commercial Banking Report Q1 2017

Human intervention plays a necessary and desirable role in all of our industry forecasting. Experience,

expertise and knowledge of industry data and trends ensure analysts spot structural breaks, anomalous data,

turning points and seasonal features where a purely mechanical forecasting process would not.

Sector-Specific Methodology

BMI's Commercial Banking Report series is closely integrated with our analysis of country risk,

macroeconomic trends and financial markets. The reports draw heavily on our extensive economic dataset,

which includes up to 550 indicators per country, as well as our in-depth view of each local market. We

collate our commercial banking databank from official sources (including central banks and regulators)

wherever possible, and only fall back on secondary sources where all attempts to secure primary data have

failed. Company data is sourced, in the first instance, from company reports, with central bank, regulator or

trade association data only used as a backup.

■ The reports focus on total assets, client loans and client deposits.

■ Total assets are analogous to the combined balance sheet assets of all commercial banks in a particular country. They do not incorporate the balance sheet of the central bank of the country in question.

■ Client loans are loans to non-bank clients. They include loans to public sector and state-owned enterprises. However, they generally do not include loans to governments, government (or non- government) bonds held or loans to central banks.

■ Client deposits are deposits from the non-bank public. They generally include deposits from public sector and state-owned enterprises. However, they only include government deposits if these are significant.

■ We take into account capital items and bond portfolios. The former include shareholders funds, and subordinated debt that may be counted as capital. The latter includes government and non-government bonds.

In quantifying the collective balance sheets of a particular country, we assume that three equations hold

true:

■ Total assets = total liabilities and capital;

■ Total assets = client loans + bond portfolio + other assets;

■ Total liabilities and capital = capital items + client deposits + other liabilities.

In terms of the equations, other assets and other liabilities are balancing items that ensure equations two and

three can be reconciled with equation one. In practice, other assets and other liabilities are analogous to

inter-bank transactions. In some cases, such transactions are generally with foreign banks.

In most countries for which we have compiled figures, building societies/thrifts are an insignificant part of

the banking landscape, and we do not include them in our figures. The US is the main exception to this.

United Kingdom Commercial Banking Report Q1 2017

In some cases, total assets and client loans include significant amounts that are owned or that have been lent

to customers in another country. In some cases, client deposits include significant amounts that have been

deposited by residents of another country. Such cross-border business is particularly important in major

financial centres such as Singapore and Hong Kong, the richer OECD countries and certain countries in

Central and Eastern Europe.

Risk/Reward Index Methodology

BMI's Risk/Reward Index (RRI) provides a comparative regional ranking system evaluating the ease of

doing business and the industry-specific opportunities and limitations for potential investors in a given

market. The RRI system is divided into two distinct areas:

Rewards: Evaluation of a sector's size and growth potential in each state, and also broader industry/state

characteristics that may inhibit its development. This is further broken down into two sub categories:

■ Industry Rewards. This is an industry-specific category that takes into account current industry size and growth forecasts, the openness of market to new entrants and foreign investors, to provide an overall score for potential returns for investors.

■ Country Rewards. This is a country-specific category, and the score factors in favourable political and economic conditions for the industry.

Risks: Evaluation of industry-specific dangers and those emanating from the state's political/economic

profile that call into question the likelihood of anticipated returns being realised over the assessed time

period. This is further broken down into two sub categories:

■ Industry Risks. This is an industry-specific category whose score covers potential operational risks to investors, regulatory issues inhibiting the industry, and the relative maturity of a market.

■ Industry Risks. This is a country-specific category in which political and economic instability, legislation and overall business environment are evaluated to provide an overall score.

We take a weighted average, combining industry and country risks, or industry and country rewards. These

two results in turn provide an overall Risk/Reward Index, which is used to create our regional ranking

system for the risks and rewards of involvement in a specific industry in a particular country.

For each category and sub-category, each state is scored out of 100 (100 being the best), with the overall

risk/reward index score a weighted average of the total score. Importantly, as most of the countries and

territories evaluated are considered by BMI to be 'emerging markets', our score is revised on a quarterly

basis. This ensures that the score draws on the latest information and data across our broad range of sources,

and the expertise of our analysts.

United Kingdom Commercial Banking Report Q1 2017

In constructing these index scores, the following indicators have been used. Almost all indicators are

objectively based.

Table: Commercial Banking Risk/Reward Index Indicators

Rationale

Industry Rewards

Estimated total assets, 2015 Indication of overall sector attractiveness. Large markets are considered more attractive than small ones.

Estimated growth in total assets, 2015-2019

Indication of growth potential. The greater the likely absolute growth in total assets, the higher the score.

Estimated growth in client loans, 2015-2019

Indication of the scope for expansion in profits through intermediation.

Country Rewards

GDP per capita A proxy for wealth. High-income states receive better scores than low-income states.

Active population Those aged 16-64 in each state, as a % of total population. A high proportion suggests that the market is comparatively more attractive.

Corporate tax A measure of the general fiscal drag on profits.

GDP volatility Standard deviation of growth over seven-year economic cycle. A proxy for economic stability.

Risks

Industry risks

Regulatory framework and industry development

Subjective evaluation of de facto/de jure regulations on overall development of the banking sector.

Regulatory framework and competitive environment

Subjective evaluation of the impact of the regulatory environment on the competitive landscape.

Country Risks

Short-term financial risk Rating from BMI's Country Risk Ratings (CRR), evaluating currency volatility.

Policy continuity Rating from CRR, evaluating the risk of a sharp change in the broad direction of government policy.

Legal framework Rating from CRR, to denote strength of legal institutions in each state. Security of investment can be a key risk in some emerging markets.

Bureaucracy Rating from CRR to denote ease of conducting business in the state.

Source: BMI

United Kingdom Commercial Banking Report Q1 2017

Weighting

Given the number of indicators/datasets used, it would be inappropriate to give all sub-components equal

weight. Consequently, the following weights have been adopted:

Table: Weighting Of Indicators

Component Weighting, %

Rewards 70, of which

Industry Rewards 60

Country Rewards 40

Risks 30, of which

Industry Risks 40

Country Risks 60

Source: BMI

United Kingdom Commercial Banking Report Q1 2017

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