The U.K.’s biggest banks are likely to see troubled loans surge by 2022 as the fallout from the coronavirus pandemic eats its way through the economy, Moody’s said in a report Tuesday.
The New York-based credit ratings agency anticipated problem loans to nearly triple, to 4.1% of gross loans in 2022 from 1.4% in 2019. Predicted outcomes vary for the six banks the report focused on, with Lloyds Banking, NatWest and Barclays Bank U.K. showing profit growth by 2022, and HSBC U.K. Bank, Santander U.K. and Nationwide Building Society still posting lower net income figures.
Although the hit to asset quality is expected to have some impact on the banks’ financial health, overall they remain well-capitalized and appear able to weather the shock, Moody’s said.
“Nevertheless, the negative impact on their creditworthiness will increase in proportion to the severity and duration of the crisis,” Moody’s analysts said in their report.
The U.K. has tamped down the virus after it initially took hold this spring, with a rolling seven-day average of seven to 13 deaths per day since mid-August, but new cases are on the rise. The country has increased its caseload by 2,600 to 3,600 each day since Sept. 6.
The level of credit deterioration anticipated for each bank depended on portfolio balance, with unsecured consumer and corporate lending seen as the most vulnerable to the ravages of the pandemic.
“Large U.K. domestic banks’ overall asset quality will decline as a result of the coronavirus crisis, particularly among those that are more exposed to consumer lending such as Barclays Bank U.K. and Lloyds Bank: we estimate their problem loans will rise 330 and 320 basis points, respectively,” said Alessandro Roccati, senior vice president for Moody’s Investors Service.
Despite trouble ahead, Moody’s anticipated that the companies have sufficient capital to reach a recovery phase in 2021 and 2022, with Lloyds, Barclays, HSBC and Santander keeping their tangible common equity ratios below 20% through 2022, and Natwest hovering just above that mark. Nationwide’s ratio was near 35% in 2019, but is actually expected to fall slightly in the next two years.
That may be an important health indicator for these banks, as credit costs are expected to shoot up between 2019 and 2022, roughly quadrupling for Lloyds to just under GBP 5 billion ($6.44 billion), and tripling for Santander U.K. to around GBP 1 billion ($1.29 billion).