UK Finance’s latest must–read blogs

Assessing the impact of Basel 3.1 on mid-tier banks’ ability to support the UK economy?

Working with UK Finance and our members, EY LLP has examined the effects on mid-tier banks’ ability to lend to Small and Medium Enterprise (SME) and provide buy-to-let mortgages (BTL) under the PRA’s proposals for implementing Basel 3.1 in the UK.?

Many of our mid-tier members that use the Standardised Approach to calculate risk weighted asset capital requirements have for some time expressed concerns around the implementation of Basel 3.1; particularly the increase in risk weights for BTL Mortgages and SME lending, if the SME supporting factor is removed and risk weights for unconditionally cancellable commitments are brought in. Larger firms using the Internal Ratings Based (IRB) approach for capital calculation will not be subject to this increased risk weighting immediately, due to the five-year phasing of the output floor. At the opposite?end of the scale, the PRA has proposed a ‘Transitional Capital Regime’ for firms meeting the Small Domestic Deposit Takers (SDDT) definition, allowing them to remain on the current Basel 3/CRR standards. Both measures effectively defer potential future capital impacts but mid-tier firms will?face an immediate cliff edge for both SME and BTL lending.?

This will place mid-tier firms in a difficult position. Their assets are growing and evolving, and often have specific concentrations where a risk/reward balance is found which is not currently well-catered for by larger (or smaller) lenders. Such concentrations can include BTL lending and SME financing.?

In its?study, using stylised examples, EY LLP has estimated that this may result in a 24 per cent reduction in mid-tier banks’ appetite for lending to SMEs or an increase in capital of about 30 per cent.?These increases will result in increased SME borrowing costs of on average of 30 basis points although the impact is likely to higher in some subsectors of the market. The increase in risk weights for BTL’s will increase capital requirements by around 24 per cent, or bring about a 19 per cent reduction of lending, We expect this to impact professional BTL landlords the hardest, potentially decreasing the stock of private rented accommodation, driving more renters in to the social housing sector.?

Read the full blog post by Simon Hills , Director?Prudential Policy, UK Finance .?

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Shedding light on rising credit reliance and financial resilience?

The Equifax 2024 Financial Health Report highlights the UK’s increasing reliance on credit, alongside a rise in arrears levels in the mortgage and auto lending markets and a gender divide in financial resilience. How can the industry step in and support??

A year on from our last report, the macroeconomic situation has somewhat stabilised, with consumers effectively navigating current economic challenges and adapting their credit habits. But this doesn’t tell the full story and there are still many challenges facing consumers financially.?

While there is little evidence of consumers struggling to keep up with monthly repayments, there are nonetheless early signs of increased reliance on credit cards. Total outstanding credit card debt has been steadily rising, up 9.7 per cent in 2023 to reach ￡67.4 billion by year end. There has also been an uptick in high credit card utilisation levels and the number of cards exceeding their credit limits.?

Meanwhile, consumers are depleting their previously accumulated savings, and there are increased arrears levels in both the mortgage and auto loans sectors. More mortgage holders have been stretching out their loans terms to over 35 years to counteract higher interest rates, and while this might ease the immediate burden, it raises concerns about the long-term consequences.?

Challenges exaggerated across genders?

Against this backdrop, another challenge is the noticeable gender disparity in financial resilience. While overall confidence in paying off debt is high, there's a split between men and women, coupled with a 38 per cent difference in savings between the genders by the time they hit 75.?

What can the industry do??

The way in which the industry is responding is positive, with better use of data helping to power better lending decisions and – ultimately - better outcomes for consumers. As an industry, we have never had more tools at our disposal and innovation remains a priority. Nonetheless, the reality of how consumers are struggling to make ends meet remains alarming.?

Read the full blog post by Paul Heywood, Chief Data and Analytics Officer, Equifax LTD. ?

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?Navigating the waves – the ups and downs of UK Public M&A in 2024?

Despite a multitude of geopolitical, economic and regulatory challenges, the UK has seen a surge of public M&A transactions in the first quarter of 2024. What has catalysed this uptick and can we anticipate the momentum to continue for the rest of the year??

The deals that got away in 2023?

The M&A markets in 2023 were subdued. Most of the public M&A transactions were in the lower and mid-markets (under ￡500m and/or AIM listed) range. Whilst we saw significant interest from potential bidders (particularly from foreign bidders and financial sponsors seeking to take advantage of low valuations), the cost of financing in the high interest / inflationary environment and the valuation gap put a dampener on the successful execution of public M&A last year.?

What has happened in 2024 thus far??

The first quarter of 2024 has shown a healthy uptick in public M&A activity in the UK, signalling a growing appetite particularly for strategic corporate transactions.?

13 firm offers have been announced in Q1 2024, with the majority by strategic bidders. Deal values have also increased, with a shift of focus to the higher end (￡1bn+) market and LSE Main Market listed companies. As we look across sectors, telecoms and computer / electronic solutions have been the most active sectors for consolidation so far. With active strategic bidders, there has been an increase in share exchange offers. There has also been a return to more competing bids.?

Looking ahead in 2024?

We expect that a pent-up demand for growth and the capital deployment schedules for financial sponsors will be drivers for ongoing market activity in excess of that in 2023, especially at the high-end. This will potentially benefit?all sectors but will be particularly seen in sectors that demonstrated resilience and potential during the economic uncertainty of the past few years such as technology infrastructure and healthcare.?

Whilst optimism feels justified for deal-making activities to continue for the rest of 2024, the road ahead is not without its challenges. Ongoing geopolitical tensions and upcoming elections continue to inject a degree of caution into cross-border M&A activity, and the newfound confidence is fragile. Furthermore, the increased scrutiny by anti-trust and foreign investment regulators in UK, Europe and US will continue to be a key gating consideration for many strategic transactions. Potential bidders are often undertaking enhanced anti-trust and foreign investment assessments prior to making an approach. It remains to be seen as to whether the valuation gap for the UK listed markets will close sufficiently to lead to more widespread activity than is currently the case.

Read the full blog post by Ian Fenn , Partner and Fionna Ng , Managing Associate, Linklaters ?

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