S&P: UK banks’ poor 2020 earnings mask a hint of optimism for future creditworthiness
The recently published full-year 2020 results laid bare the negative financial impact of Covid-19 on all U.K. banks as earnings performance was poor. The results did, however, offer signs of a silver lining, rather than a threat, for UK bank ratings, S&P Global Ratings noted in a report published today.
First, fourth-quarter earnings were generally better than market consensus due to a marked decline in impairment charges. Second, banks resumed shareholder distributions as a sign of their confidence in the future, typically up to the temporary guardrail limits set by the Bank of England (BoE), and yet bank regulatory capital ratios further improved to new highs. And, third, banks opined that the need to further build provisions may well revert to historic norms in 2021, as the large provision built up in the first half of 2020 appears to them to be sufficient.
“These rays of optimism, combined with the relative success of the vaccine rollout in the U.K., may yet contribute to outlook revisions to stable from negative in the coming months,” said S&P Global Ratings credit analyst Nigel Greenwood. But, ultimately, we take a long-term approach to our ratings analysis and are cognizant that the Covid-19-induced economic downturn accelerated the pre-existing challenges for bank business models from the low rate environment that has been a growing ratings focus across European banks.
“The likely fall in UK bank revenues again in 2021 indicates that there is limited ratings upside in the medium term, particularly for banks with negative outlooks,” Mr Greenwood added. And while balance sheets are relatively robust, this is not the case for some of the consumers and businesses they serve. With the finishing line of the third U.K. lockdown in sight, market questions focus on whether businesses will run out of cash just as the economy turns, and if they will manage to contribute to the much-needed recovery. Related to this, we are yet to see whether the general population has become more risk averse and if the extension of government spending will squeeze out private enterprise. These will be key rating themes that we will explore with bank management, along with the expanded digital and environmental agendas, and regulatory pressure for banks to support vulnerable customers.
This report does not constitute a rating action.
