UK bank profits 'set to drop 15%' after ring-fencing

Proposals to ring-fence UK-based banks could dent profits by up to 15% within three years, according to Morgan Stanley research, the Telegraph has reported.

The Morgan Stanley research highlighted the costs to banks of operating their UK retail and small-and-medium sized corporate banking businesses as ring-fenced subsidiaries.

Royal Bank of Scotland is set to be hit the hardest, with ring-fencing estimated to cost the bank £1.4bn a year by 2014, or 15% of its forecast pre-tax profits.

RBS' share price dropped from a high of 36p per share to a low of 20p during the recent weeks of volatility, standing today at roughly 23p.

Barclays will also suffer significantly, the paper suggests, with the estimated cost of ring-fencing of its UK retail operations totalling £1.4bn within three years, or a 12% reduction in pre-tax profit.

The Independent Commission on Banking (ICB) is due to publish recommendations on 12 September.

Morgan Stanley said the ICB's proposals will be "diluted" when the government weighs up the benefits against the costs to the UK economy.

Analysts are concerned the ICB's plans will reduce competition between banks and slow UK economic growth.