By Scott Wright

THE UK’s biggest banks will continue to find their growth prospects constrained in 2020 amid expectations of muted economic growth and continuing political uncertainty, despite the election result effectively ending the Brexit stalemate, experts say.

A deluge of last-minute claims for PPI (payment protection insurance) mis-selling, taking overall industry pay-outs to more than £50 billion, and Brexit stasis meant 2019 was challenging for big names such as Royal Bank of Scotland, Lloyds Banking Group and Virgin Money, the new name for the lender formerly known as CYBG.

The ongoing political uncertainty was frequently cited as business investment remained sluggish, while intense competition in the mortgage market, underpinned by ultra-low interest rates, acted as a brake on growth.

The FTSE 350 Banks index grew over the year, and there were modest increases in the share prices of Royal Bank and Lloyds, owner of Bank of Scotland, in 2019. City watchers have told The Herald the big banks will struggle to fare much better this year.

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The Bank of England forecasts the UK economy will expand at a below long-term trend of 1.6%, and there is a widespread view that political uncertainty will again be a dominant theme as talks between the UK and the EU over their future trading arrangements get under way.

Alasdair Ronald, an investment consultant in the Glasgow office of Brewin Dolphin, said: “Growth worldwide is slowing. The UK is certainly not out of that [and] you are still going to have the Brexit uncertainty. Okay, we are going to leave the EU, but we all know that not all the deals are done. That is bound to lead to uncertainty, not just for businesses, but individuals as well.

"There is not the same demand for lending as there was previously. Then you look at the banks and mortgages. Because there is so much competition in the mortgage market, they are cutting back.

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"Nationwide has already said it will rein in some new mortgage lending because margins are coming under pressure and Virgin Money suspended the dividend… [as it] pointed to an uncertain outlook in 2020. I think there are a lot of uncertainties for the banking sector as a whole, and they are not going to go away.”

Mr Ronald said Royal Bank, now led by Alison Rose, can take solace from having consigned most of the legacy issues which plagued it after the financial crisis to the past.

And banks will benefit because provisions for PPI have come to an end. But Mr Ronald believes it will remain difficult for them to grow profits. He said: “I think the outlook for banks, if you are looking purely at their trading in the next year or two years, is going to continue to be difficult, but a lot of the legacy issues that have really hammered the second over the past 10 years… the worst of that is over.”

Michael Hewson, an analyst at CMC Markets, said the banks will take succour from the fact the General Election did not result in victory for Jeremy Corbyn, who had raised the prospect of Royal Bank being fully nationalised under a Labour Government.

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He said clarity on the Brexit process gives grounds for cautious optimism for the sector in 2020. But Mr Hewson, who believes the banks performed solidly in 2019 despite the challenges, said Brexit may throw up more complications.

He said: “The next key risk will be around whether the UK has to apply for an extension to the transition period, once the withdrawal agreement has made its way through the UK parliament. The biggest risk to profitability next year is the prospect of more Brexit stalemate as well as another Bank of England rate cut, after two policymakers called for a 25bps (basis point) rate cut at the most recent meeting.

“The UK economy still looks in reasonable shape at the moment with rising wages and low unemployment, however it is still vulnerable to a sustained downturn, even if political gridlock now finally appears to have dissipated. Now that we look set to move on to the next stage of Brexit negotiations, we might see some pent up demand unleashed as businesses take advantage of any progress or clarity with respect to the UK’s future trading relationship with the EU as well as the rest of the world.”