Corporate
Risks and Uncertainties
The key risks and uncertainties faced by Corporate include a deterioration in the UK and European economies, competitive pressures, market conditions not being conducive to investment portfolio realisations, the recruitment and retention of appropriately skilled colleagues and the availability and cost of funding.
A significant deterioration in the UK and European economies, leading to reduced profitability in the corporate sector and increased corporate insolvencies, could result in an increase in impairment losses and lower appetite for borrowing, resulting in lower lending volumes and profitability. Further, a fall in commercial property prices could affect the profitability of our real estate lending. To mitigate this, we back property entrepreneurs who have a track record of operating through the economic cycle. Our commercial real estate exposures are not secured primarily on the value of the collateral but on the strength of the underlying cash flows of the businesses we back.
Competitive pressure on margins is a key feature in many segments of the corporate market and in an adverse credit or competitive cycle our ability to maintain appropriate levels of returns to shareholders may be adversely affected. To mitigate this risk we maintain an appropriate risk appetite, which is focused on the protection of returns, based on a strategy of selective lending. Our market understanding, asset quality, sound customer and partner base, proven track record and sector intelligence (which has been further enhanced through our asset class management strategy) are all designed to manage the balance between risk and return.
Realisations from our investment portfolio could be adversely affected by a general economic downturn. In mitigation, we have a well diversified Corporate business which we believe will continue to generate sound returns.
Many of the division’s activities require specialist skills and experience. Our ability to maintain and build on our differentiated approach to corporate banking will rely on our ability to attract and retain colleagues with the appropriate experience.
We price loans on the basis that we will hold them on the balance sheet. Nevertheless, we have, over the last few years, invested in our loan distribution capabilities and increased the levels of loans sold down. Less liquid syndication markets could see a reversal of this trend.