S&P: UK banks show balance sheet resilience in latest stress test
The Bank of England’s latest stress test showed that the UK’s largest financial institutions have robust balance sheets and are resilient to potential stress–including a further escalation of the Covid-19 pandemic.
The U.K.’s seven major banks and largest building society, which passed the stress test, exceeded the capital and leverage hurdles set in the exercise, with none required to revise capital or distribution plans.
“The results indicate the sector is well positioned to manage a potential severe deterioration in credit conditions and is consistent with our strong ratings on the participating institutions,” said S&P Global Ratings credit analyst Richard Barnes.
The groups participating in the stress test were Barclays, HSBC Holdings, Lloyds Banking Group, Nationwide Building Society, NatWest Group, Santander UK Group Holdings, Standard Chartered, and–for the first time– Virgin Money UK. Together, they represent about 75% of lending to the U.K. real economy. The exercise’s initial results were an input to the BoE’s decision to remove its pandemic-related restrictions on dividends and share buybacks earlier this year (see “Bulletin: U.K. Banks Are Freed To Increase Shareholder Distributions,” published on 13 July 2021).
The stress test was based on the severe but plausible scenario of a synchronized global slowdown following close on the heels of last year’s deep recession. For the UK economy, the stress assumptions included a 37% cumulative GDP decline across 2020-2022, a 33% peak-to-trough fall in domestic property prices, and unemployment peaking close to 12%. Applying this scenario to banks’ balance sheet resulted in a material hypothetical hit to their capital ratios.
The U.K. banking sector booked significant credit provisions in the first half of 2020 and has steadily released them this year as economies recovered from the effects of the pandemic and defaults remained benign. Provision coverage still stands above pre-pandemic levels, which, in conjunction with solid capitalization, provides a cushion for banks to manage a severe economic slowdown, which is not our central expectation.
The emergence of the Covid-19 omicron variant may cause banks to delay the release of remaining IFRS 9 management adjustments, which are qualitative overlays that supplement modeled credit provisions.
This report does not constitute a rating action.