Third UK lockdown ‘credit negative for banks' asset quality’ - Banking, Regulation & Risk -
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Additional lockdown measures will add negative pressure to banks' profitability, according to Moody’s.

British prime minister Boris Johnson announced a full lockdown in England this week in response to a new surge in coronavirus infections, which also prompted lockdowns in varying degrees in Scotland, Wales and Northern Ireland.

In response, chancellor of the exchequer Rishi Sunak announced one-off top-up grants to support retail, hospitality and leisure businesses, and funding for local authorities and regional governments to support businesses not eligible for the top-up grants.

“Although the support measures are themselves credit positive, they are outweighed by the larger credit-negative effects of a third lockdown across the UK that will challenge bank asset quality as business revenue and cash flow is squeezed anew after a tough 2020,” wrote Maxwell Price, an analyst at Moody’s in a report published on January 6.

“The additional lockdown measures will add negative pressure to banks' profitability, given likely effects on new loan origination, reduced fee income and additional provisioning for expected credit losses, all exacerbated by the low interest rate environment,” he said.

New support measures

The latest support measures include one-off grants of up to £9,000 ($12,200) per property for businesses in highly affected sectors such as retail, hospitality and leisure. Also, a further £594m in funding for regional and local authorities in England will be made available to support businesses that do not qualify for grants.

And, there is additional funding for the devolved governments of Scotland (£375m), Wales (£227m) and the Northern Ireland executive (£127m).

Previously announced measures included business grants of up to £3,000 for closed businesses, the extension of the UK furlough scheme until 31 April 2021, 100% government-backed loans until March 31, 2021, 100% business rates relief for the retail, hospitality and leisure sectors and £1.1bn of funding for local authorities.

The combination of both new and old support packages will soften the negative effect on banks' asset quality, Mr Price added. However, the harsher and prolonged coronavirus restrictions will only delay the realisation of bank credit losses, shifting them to the second half of 2021 rather than eliminating them altogether,” he said.

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