Britain’s banks brace for $22 billion loan losses as outlook darkens

LONDON (Reuters) – British banks saw their second quarter earnings more bleak than almost all of their European counterparts as they risked harsher worst-case scenarios due to coronavirus fears, Brexit and low interest rates.

FILE PHOTO: HSBC and Barclay buildings in the Canary Wharf financial district in London, Great Britain, 19 November 2018. REUTERS / Toby Melville / File photo

Investors had expected a strong line of half-year results, but Barclays (BARC.L), Standard Chartered (STAN.L), Lloyds (LLOY.L), NatWest Group NWG.L and HSBC (HSBA.L) fell short of these low expectations.

Provisions for potential credit losses in the five banks exceeded $ 22 billion, exceeding analysts' forecasts and increasing selling pressure on stocks hit by the pandemic earlier this year.

France's BNP Paribas (BNPP.PA) and Credit Suisse (CSGN.S) exceeded analyst forecasts and benefited from bumper trading volumes and relatively modest provisions.

HSBC and Lloyds were penalized for poor results, with both banks' lowest levels in 11 and 8 years, respectively.

All five UK banks underperformed, falling 42% to 55% this year compared to a 36% decline in the European banking index .SX7P.

"British banks have been experiencing a stronger economic downturn than most Europeans as Britain has been more shocked by the COVID-19 pandemic that has affected supply levels," said Patrick Hunt, partner at consulting firm Oliver Wyman .

The UK economy is expected to shrink by 11.5% this year, while the euro area will shrink by 9.1% in June, according to OECD forecasts.

Other factors that are weighing on British banks are a relatively higher exposure to unsecured consumer credit, a stronger fall in central bank interest rates and the potential for an exit from the Brexit transitional arrangements in late 2020, analysts said.

The introduction of further barriers in the north of England in response to an increase in infections also threatens to impact the country's emerging economic recovery and further damage bank balance sheets.

HARD CHOICES

NatWest and Lloyds provided guidance that loan loss provisions should be lower in the second half of the year, which raised hopes that the country's banks have sunk the kitchen provision and could prevail over European competitors.

However, they also warned that the outlook could deteriorate further, and drastically downgraded their worst-case forecasts for the economy. They forecast a GDP decline of up to 17% in 2020.

The larger provision of British banks compared to their European competitors was largely due to the fact that the former had included darker worst-case forecasts in their economic models.

For example, Lloyds said UK worst-case GDP could drop 17.2%, compared to a 7.8% decline that was previously modeled as an extreme downturn when the bank reported results in April.

While European competitors did not disclose their models in such detail, Deutsche Bank (DBKGn.DE) allowed a more modest downward movement in German GDP by 2 percentage points compared to the base case in its unfavorable scenario.

This inequality is reflected in the returns that banks pay on their debts.

The bonds of Deutsche Bank DE187315832 = due in August 2023 were traded on Tuesday with a yield of 0.03%, 38 basis points less than a comparable Barclays note from September 2023 GB187398274 =. In January, Barclays' return was lower than its German counterpart.

"The quality of assets in the UK appears to be deteriorating faster than in Europe, and this is reflected in the bonds," said Filippo Alloatti, credit analyst and portfolio manager at Federated Hermes.

Katie Murray, NatWest's chief financial officer, said the bank's worst case scenario included both additional bans to control the spread of the virus and a disruptive Brexit.

HSBC said its business in the UK, where a $ 1.5 billion charge against expected credit losses was charged, was particularly badly affected and will try to accelerate cost-cutting plans, including layoffs.

Tom Merry, head of financial strategy at Accenture, said banks are giving priority to preparing for a difficult second half of cutting costs and preparing for restructurings and collections, including improving credit risk modeling to spot red flags.

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According to Merry, the cost reduction is likely to include further closings of offices and offices, with all investment spending on digital services.

"On the other hand, if a good thing results for banks, they are stronger if they can accelerate the digital transformation."

($ 1 = 0.7651 pounds)

Reporting by Iain Withers and Lawrence White, additional reporting by Abhinav Ramnarayan. Edited by Jane Merriman

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