S&P: UK bank credit losses could fall 40% In 2021
Having tripled in 2020, we expect loan loss rates for UK banks to move firmly toward pre-Covid levels in 2021, S&P Global Ratings notes in a report published today.
“We expect domestic credit losses across UK banks to approach £8bn for the year, or 40 basis points of systemwide lending. This is a fall of almost 40% from 2020, but still around double 2019 levels for the sector,” said S&P Global Ratings credit analyst Will Edwards.
The decline from the highs of 2020 will likely result from rapid falls in impairments for corporate lending (impairment rates 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 normalize (to 0.05% from 0.1%).
Though these are precipitous declines from 2020, these rates remain almost double those typically observed in the 2014-2019 period. We see this as indicative of the uneven macroeconomic outlook in 2021, with strong GDP growth in the second half offset by increasing unemployment levels.
The pandemic shook global economies in 2020, and UK bank balance sheets were not immune to the fallout. Loan impairment charges from domestic lending grew to £13.2bn for the year from around £4.3bn in 2019 as the macroeconomic environment faltered amid UK -wide restrictions on economic activity. That said, a coordinated fiscal and monetary policy response has preserved the economy, protecting the UK’s employment rate, house prices, and corporate liquidity. However, while model-led loan loss provisions spiked following acute pressure on the economy, accompanied by subsequent increases in expected consumer and corporate credit risk, we have yet to see a sustained deterioration in UK bank asset quality. All told, although credit losses spiked, they were still around £5 billion lower than our 2020 forecasts.
“Despite ongoing risks for UK banks, we see some room for optimism in our estimates as we look toward the UK’s economic recovery with growing confidence,” said Mr. Edwards. “This could even accelerate if banks consider releasing provisions, most likely in the second half of the year,” he added.
