Bank Industry Insights: October 2024 edition

On Wednesday, our first female UK Chancellor delivered the first Budget of the Labour government. At its heart was a plan to fix the country’s “broken” public finances – starting with ￡40bn of tax increases, with businesses bearing the brunt of the increase. Reeves maintained the Monetary Policy Committee's target of 2% inflation, which is forecast to be 2.5% in 2024 (up from the 2.2% forecast in March), rising to 2.6% in 2025.

On the same day in the US, the data from the Bureau of Economic Analysis showed that GDP rose at a 2.8% rate, which was only slightly short of economists’ estimates for a 3% expansion. Consumer spending is being credited with the rise, despite lingering inflation pressures. The Fed had been holding interest rates high in order to tackle inflation, with their first reduction since 2020 taking place last month. They are due to meet again to decide on interest rates next week, but political risks and the upcoming US election add a degree of uncertainty to the economic outlook. However, the market forecasts suggest a further rate cut in November and/or December, totalling a drop of 0.75% by the end of the year.

Continued focus on inflation rates and consequent interest rates was one of the major themes coming out of my recent visit to the US, Dubai and Australia, where M&A activity is expected to increase, as interest rates continue to decrease. Reflecting on my time away, it is clear that the banking industry is undergoing significant transformations. Some other major themes coming through include:

• The ESG conundrum. ESG loans accounted for 27% of all syndicated loans in EMEA in Q1 2024. Whilst the EU and UK are leading in ESG regulation, with new disclosure rules and reporting requirements being introduced, the financial benefits of ESG loans are often outweighed by setup costs, including documentation and third-party verification. Understandably, Banks are highly sensitive to issues of greenwashing, and the implementation of LMA sustainability-linked loan riders is costly for borrowers.
• The necessity of technological investment. Banks are investing heavily in technology to stay competitive. Enhancing customer experiences through digital platforms and personalised services is a priority. Initiatives like open banking is fostering innovation and competition, allowing third-party access to financial data and growing deposit bases for digital banks. Proactive regulation supports innovation while ensuring operational resilience and cybersecurity. UK regulators like the FCA and PRA support innovation through initiatives like the regulatory sandbox, and the Financial Services and Markets Bill promotes blockchain and crypto assets.

I am looking forward to exploring these themes more with you, as well as other key messages coming out of my trip, in an upcoming special report.