Lloyds and Santander risk losing “tangible book value” due to their exposure to rising interest rates, MSCI has told its clients.
In a paper for clients that looks at how banks are set to deal with protectionist policies driven by populism and shifting governance demands, MSCI said that rising interest rates due to the “Trump Effect” and changing populist policies may actually be a loss leader for 10% of banks.
“In fact, Lloyds and Santander stand out with significant loans to economically sensitive borrowers – an increase to interest rates that spurs a 30% default rate to their most vulnerable retail book could wipe out tangible book value of both companies,” MSCI told its clients.
MSCI identified 21 of 77 countries that showed signs of populism, both in the east and west.
Barclays stood alone as the outlier with the “most to lose and least to gain” from Trump‐like policy. Retail lending to vulnerable consumers represented 100% of tangible book value, human capital management strategies fell below global peers, and cross‐border transactions could face new costs, said MSCI.
Rising governance issues for banks is primarily an issue in the east, MSCI said.
“If rising populism wasn’t potential problem enough, 58% of banks are facing potential governance shift, of which 17%, including Sumitomo, UFJ, and Santander are likely targets of shareholders given weaknesses in board efficacy, lower than average [return on equity], and few limitations to potential shareholder activism,” the report said.
Overall, of the 50 largest banks MSCI said that Hang Seng, China Construction, and NAB stood out for long-term preparedness, whereas HSBC, Sumitomo, and Lloyds should be avoided.
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