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Western EuropeApril 8 2021

Loan losses at UK banks forecast to fall 40% in 2021

S&P Global has yet to see sustained deterioration in UK bank asset quality as country slowly emerges from pandemic.
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Loan losses at UK banks forecast to fall 40% in 2021

Credit losses at UK banks are expected to fall almost 40% this year compared to 2020 as the country emerges from the pandemic, according S&P Global, despite the impact of Brexit and the rollback of Covid-19 support measures

Loan loss rates at UK banks tripled last year as the macroeconomic environment faltered amid UK-wide restrictions on economic activity. Loan impairment charges from domestic lending grew to £13.2bn ($18.1bn) in 2020 from about £4.3bn in 2019.

However, a coordinated fiscal and monetary policy response has preserved the economy, protecting the UK’s employment rate, house prices and corporate liquidity, said Osman Sattar, director, Europe, the Middle East and Africa financial institutions at S&P Global.

S&P Global expects loan loss rates to move towards pre-Covid-19 levels this year although domestic credit losses are still expected to hit almost £8bn in 2020.

“The fiscal support to both households and businesses has largely been effective in limiting the extent of loan deterioration. As that support gets unwound, it’s inevitable that there will be pockets of risks that will emerge and turn loans into problem loans,” Mr Sattar said.

Impairment rates down

The decline in loan loss rates has been caused by sharp falls in impairments for corporate lending (impairment rates are down to 0.8% from 1.4%), moderating provisioning needs in unsecured books (rates down to 2.9% from 4.1%), and mortgage provisioning beginning to normalise (to 0.05% from 0.1%).

Impairment rates nonetheless remain almost double those observed in the 2014-2019 period, according to the rating agency.

The UK is yet to see a sustained deterioration in UK bank asset quality, according to S&P Global. Although credit losses spiked, they were still around £5bn lower than the rating agency’s 2020 forecasts.

Across leading UK banks there is a significant stock of performing stage 2 assets, ranging from 12.8%-20.9% of gross loans. At the same time, the stock of stage 2 loans more than 30 days in arrears ranges from below 0.15%-0.8%, little changed from a year ago. Moreover, the data shows only a modest increase in impaired or stage 3 loans.

Mr Sattar said despite ongoing risks, if the UK economy rebounds in line with S&P forecasts then banks may consider releasing provisions in the second half of 2021.

“Provisions increased quite substantially at a few UK banks towards the end of 2020. But if things continue in line with our base case scenario – the vaccination programme going well, and lockdown coming to an end — then there is scope for provisions to be released even as [government] support gets unwound, if any pockets of credit risk that emerge are limited” Mr Sattar said.

“In light of the uptick in provisions UK banks made in 2020, which was substantial, they’re in a relatively comfortable position.”

Brexit risks

UK gross domestic product (GDP) is forecast to grow by 4.3% in 2021 and 6.8% in 2022, according to S&P Global. Nonetheless, the rating agency describes the macroeconomic outlook in 2021 as “uneven” with strong GDP growth in the second half of this year offset by rising unemployment.

The risks posed by the UK’s exit from the EU single market in January also weigh on long-term economic forecasts.

The UK-EU Brexit deal that was agreed in December 2020 was in line with S&P Global’s base case outlook before the pandemic: a very thin deal focused on goods and not services despite the fact the UK is a predominantly services-based economy, Mr Sattar said.

“Once the impact of the pandemic is behind us, we are back to Brexit square one: a thin deal with limited access to the single market. As a result, there will be an adjustment period and declines in GDP relative to what would otherwise have been the case if the UK had carried on as a member of the EU.”

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Read more about:  Regulations , Western Europe , UK