S&P: UK banks face a bumpy road to earnings recovery in 2021, says report
UK bank earnings are likely to improve in 2021, but the sector must first negotiate a tricky start to the year, including renewed Covid-19 lockdown restrictions, S&P Global Ratings said in a report published today on RatingsDirect titled UK Banks Face A Bumpy Road To Earnings Recovery In 2021.
However, the early implementation of a vaccination program raises hopes that daily life could begin to normalize later in the year. U.K. banks’ 2020 credit impairment charges were among the highest in Europe, and we expect they will decline this year as the economic recovery gets underway. Although this should support an improvement in profitability, absolute returns on capital will likely remain mediocre.
We see several hazards for banks to navigate on the road to earnings recovery:
- A new Covid-19 variant has accelerated the infection rate and the current national lockdown is likely to remain in place until the vaccination program builds critical mass.
- Comprehensive fiscal and monetary support have kept banks’ problem loans relatively low to date, but borrower defaults, IFRS 9 stage migration, and charge-offs are set to increase this year as stimulus measures phase out.
- At the same time, U.K. businesses must adapt to less favorable terms of trade with the EU under the agreement struck late last year.
- The bank sector also faces continued ultra-low interest rates, which will constrain revenues even as the economy rebuilds.
We reflect the ongoing downside risks in our negative economic risk trend on the UK Banking Industry Country Risk Assessment (BICRA) and our negative rating outlooks on most domestically focused banks.
Although banks’ current credit provisions and capital resources provide a prudent basis to negotiate the remainder of this credit cycle, we expect 2021 impairment charges to stay above the historical trend and there remains considerable uncertainty over the scale of ultimate losses.
We could revise our negative outlooks on the sector and certain banks to stable if we become more confident in the trajectory of the recovery and the scale of banks’ ultimate loan losses.
This report does not constitute a rating action.