Morgan Stanley queries real-economy demand for lending amid Brexit

Investment bank Morgan Stanley has questioned whether there will be real-economy demand to borrow from banks given Brexit-induced uncertainty, regardless of Bank of England's recent bid to stoke such lending.

As such, Morgan Stanley, which has taken a cautious post-Brexit stance on UK banks, said it was wary on UK bank earnings given that it expected weak loan demand and margin pressure from lower rates to weigh on revenues.

This as BoE's Financial Policy Committee (FPC) yesterday slashed the counter-cyclical buffer (CCyB) to 0% out to June 2017 in a bid to ensure UK banks continued to lend to the real economy in the wake of the Brexit vote.

The FPC had indicated that regulatory capital buffers at a system level would be cut by £5.7 bn by March 2017, raising capacity for lending by up to £150bn.

"The major UK banks have signalled their willingness to lend in a joint statement with George Osborne (Chancellor of the Exchequer)," Morgan Stanley noted.

"For us, the key question is whether there will be demand from the real economy to borrow given macro and political uncertainty and given banks may look to tighten credit standards."

However, if lending opportunities were not forthcoming to deploy this capital, the FPC was crystal clear that it did not want to see it distributed to shareholders.

Morgan Stanley said that while BoE's decision yesterday assured that it would aim to avoid pro-cyclical tightening of capital standards, "we remain concerned about the outlook for UK bank earnings.

"We are most cautious on earnings for RBS, Barclays and Clydesdale as slower UK macro looks set to delay improvement in returns with limited prospects for capital return over the short to medium term," it said in a research note.

"Lloyds is our only Overweight in the sector given stronger capital trajectory, more defensive operating profitability and given we model a c.6% 2017-estimated dividend yield on our recast numbers."