In conversation: Philip Augar and Karel Williams

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On a recent visit to Alliance MBS, leading banking commentator Philip Augar joined Professor of Accounting and Political Economy Karel Williams to discuss the state of the UK banking sector.

Nearly a decade after the financial crisis UK banks are still in quite a pressured situation, says Philip Augar. “It’s taking a very long time to work through the problems because of two different issues. One is the financial losses that the banks incurred in the crisis, and the second is the restitution that the banks are having to make for the malpractice and misconduct that emerged as a result of the crisis – such as LIBOR, PPI, and the misselling of mortgage securities.”

However Philip says UK banks are now “at the beginning of the end” in terms of resolving all these issues.

“I think 2017 will probably be the last year of these heavy misconduct costs. Banks will then be able to display the underlying profitability of their businesses. Will they go back to 15 to 20% return on equity? Probably not, given their requirement to hold more capital and the fact that we are in an era of low interest rates.”

However Philip believes it will ultimately be much better for banks to grow at a more natural pace.

“Better for banks to grow within the capability of management to manage it, the capability of shareholders to understand it, and the capability of regulators to regulate it.”

Is the era of huge banks in the UK now a thing of the past then?

Added Philip: “Here in UK it probably is, but maybe not in the US. The US has the advantage of a large, highly profitable domestic market which gives the industry a solid earnings base which enables it to be more adventurous. The US also has a much stronger culture of managing discipline in financial services.”

However he said the perception that UK retail banking was unprofitable was wrong. “If you look really hard at the numbers and strip away the misconduct costs, core banking in the UK is actually profitable. The big four or five banks have an 80% market share and customers are frightened to switch. It’s a good old-fashioned oligopoly, and as such the challenger banks are up against massive vested interests.”

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