Asset quality at UK leading banks is expected to decline moderately as the government and Bank of England withdraws pandemic support, pushing up unemployment, according to Moody’s.
However, ample loan-loss provisions and strong residential property prices, which support collateral values, should limit bank losses, while new lending growth on the back of the improving economy is expected to slow the increase in the sector’s problem loan ratio.
Loan impairment provisions at leading UK banks soared between 2019 and 2020, according to The Banker Database.
The rating agency forecasts that bank profitability will improve in the near term on the back of a decline in provisions after a pandemic-related spike in 2020, with lending growth and rising fee and commission income providing further support as the economy recovers.
“These factors will counterbalance the adverse impact on net interest income of ultra-low interest rates and intensifying competitive pressure. We foresee little change in operating costs, with efficiency measures offsetting technology investment expenses,” Moody’s analysts state.
Excess capital and prudent provisioning are expected to keep banks’ loss-absorption buffers close to their current strong levels, despite a planned resumption of modest dividend distributions after a pandemic-related suspension last year.
Meanwhile, stronger organic capital generation, relative to 2020, is expected to counterbalance an increase in risk-weighted assets (RWAs), as a result of weaker asset quality and lending growth.
