UK banks’ creditworthiness will be tested as fiscal support ebbs
S&P Global Ratings says UK banks face an awful earnings environment, with the Covid-19-pandemic-induced recession resulting in large impairment charges and a prolonged zero-interest-rate bound squeezing profit margins.
However, exceptional monetary and fiscal policy intervention has eased an initial asset quality shock and reinforced bank liquidity and capitalisation.
“Banks’ macroeconomic assumptions may prove to be too benign, though provisioning has taken into account some of the anticipated increase in loan defaults and a sharp rise in unemployment,” said S&P Global Ratings credit analyst John Wright in the report published today.
We expect the planned withdrawal of government support schemes and payment holidays in coming months to be a credit inflexion point.
“UK banks’ strong balance sheets could protect ratings during this difficult stretch, in our view, though we still see downside risks to our credit loss assumptions,” Mr. Wright said.
