UK banks’ strong balance sheets should see them through
In response to the economic shock triggered by the new coronavirus, and sharp falls in asset and commodity prices, both the Bank of England (BoE) and the U.K. government have made significant announcements intended to immediately support UK businesses and households, with the banking system expected to play its part.
Despite generally disappointing results in 2019, we believe that the healthy balance sheet profile of the rated UK banks will support their credit profiles through the economic downturn, as noted in a published report.
“In particular, we think that UK banks’ current capitalisation provides a significant cushion to withstand the economic shock and support the real economy, aided by the initiatives announced by the BoE,” said S&P Global Ratings credit analyst Nigel Greenwood. “That said, asset quality will inevitably deteriorate and could pressure bank ratings if the temporary slowdown turns into a protracted recession,” he added.
The funding and liquidity profiles of the banks are robust, further underpinned by the proactive BoE action, which will be especially beneficial for the smaller, unrated lenders.
The coronavirus outbreak adds further pressure to banks’ earnings prospects. Principally, reduced economic activity and the 50 basis point cut in the BoE base rate will further constrain banks’ net interest income and fees. We are yet to see how client activity and credit demand will evolve, notwithstanding the best efforts of the authorities, and the scale of additional loan impairment provisions arising from changed economic assumptions and actual credit problem cases.
We currently see sufficient headroom within the earnings prospects of the rated UK banks to withstand these pressures and to remain comfortably profitable, and we expect shareholder distributions to bear the brunt of reduced earnings prospects. Our current ratings can withstand a temporary period of weaker earnings relative to our previous expectations, but a sustained squeeze could lead to negative outlook or rating actions.
