Britains Banks Brace for $22 Billion Loan Losses as Outlook Darkens

LONDON—Britains banks took a gloomier view than almost all their European peers in their second quarter earnings, as coronavirus fears, Brexit and low interest rates caused them to bake tougher “worst-case” scenarios into their risk models.

Investors had expected a torrid set of half-year results, but Barclays, Standard Chartered, Lloyds, NatWest Group, and HSBC fell short of these low expectations.

Provisions for potential loan losses across the five banks topped $22 billion, blowing past analyst forecasts and increasing selling pressure on shares already hammered by the pandemic this year.

A Natwest bank in Wimbledon
A Natwest bank in Wimbledon, following the outbreak of the coronavirus disease (COVID-19), London, Britain, May 1, 2020. (Hannah McKay/Reuters)

By contrast, Frances BNP Paribas and Credit Suisse beat analyst forecasts, benefiting from bumper trading volumes as well as relatively modest provisions.

HSBC and Lloyds were punished for poor results, with shares in both banks plumbing their lowest levels in 11 and 8 years respectively.

All five UK banks have under-performed, falling by between 42 percent and 55 percent this year compared to a 36 percent fall in the European banking index.

“The UK banks are facing a more significant economic drop than most Europeans as the UK has faced a bigger shock from the COVID-19 pandemic, and that has fed through into provision levels,” said Patrick Hunt, partner at consultancy Oliver Wyman.

The British economy is forecast to shrink 11.5 percent this year, while the euro area contracts 9.1 percent, according to OECD forecasts in June.

Other factors weighing on UK banks include a relatively higher exposure to unsecured consumer lending, a larger drop in central bank rates and the potential for a “no deal” exit from Brexit transition arrangements at the end of 2020, analysts said.

The roll out of further lockdowns across the north of England in response to a rise in infections also threatens to derail the countrys nascent economic recovery and damage bank balance sheets further.

Tough Choices

NatWest and Lloyds gave guidance that loan-loss provisions should be lower in the second half of the year, raising hopes the countrys banks may have “kitchen sinked” provisioning and got ahead of European rivals.

But they also warned the outlook could deteriorate further and drastically downgraded their worst case forecasts for the economy, predicting GDP drops of as much as 17 percent in 2020.

The heftier provisioning among British banks relative to their European rivals was largely because the former incorporated gloomier worst-case forecasts into their economic models.

Lloyds, for example, said Britains GDP could tumble 17.2 percent in a worst scenario compared with a 7.8 percent fall previously modeled as the extreme downside case when the bank reported results in April.

While European rivals did not disclose their models in as much detail, Deutsche Bank allowed for a more modest 2 percentage point swing to the downside in German GDP from the base case in its adverse scenario.

That disparity is reflected in the yields banks are paying on their debt.

Deutsche Banks bonds maturing in August 2023 were trading at a yield of 0.03 percent on Tuesday, 38 basis points lower than a comparable BaRead More – Source