COVID-related loan losses to rise in US, UK and Australia: Moody’s

October 16, 2020.

Loan losses related to the COVID-19 pandemic will increase in the United States, the United Kingdom and Australia, Moody’s said in a report released Friday, although the size of those increases is harder to predict.

Government stimulus programs and bank forbearance programs kept the losses in check during the first half of 2020, the rating service said, but the losses will rise as those programs expire. But the pace of economic recovery, and the timing of when those programs end, makes it difficult to say just how much the losses will increase.

The factors behind the expected losses differ among the countries, Moody’s said. In the U.S., loan losses will depend on unemployment trends because of the banks’ dependence on credit card portfolios, which will take a hit if unemployment rises in 2021, according to the ratings agency. 

Although most of the losses are expected to come from pandemic-affected businesses in retail, hospitality and aviation, Moody’s said that US banks’ exposure to those sectors is “relatively contained.”

Meanwhile, U.K. banks are likely to see the biggest rise in nonperforming loans, Moody’s said, because the country faces a higher economic contraction than the U.S. or Australia. Because some of the loans relate to restructured loans and not to default exposures, however, the U.K. might not report the biggest increase in loan losses. U.K. banks also have a “relatively high volume of loans showing signs of deterioration and higher exposure to unsecured lending” than Australian banks, the ratings agency said, and some U.K. banks “also have higher exposure to at-risk corporates than their U.S. counterparts.”

Moody’s expects the U.K.’s real GDP to shrink by 10.1% because of the pandemic, compared with 5.7% in the U.S. and 5.3% in Australia. 

Australian banks, for their part, have made more moderate provisions for loans, although their exposure to the at-risk sectors is higher, according to Moody’s. The banks’ focus on residential mortgages provided a buffer against the economic effects of the pandemic, the ratings agency said, because housing prices would have to drop significantly for banks to suffer losses on their housing loans.

In all three countries, fiscal support and the relaxation of lockdown restrictions has led to a rebound in economic activity since the first half of 2020, Moody’s said, adding that the increase is reflected in such factors as growth in retail sales and mortgage applications. But economic activity is still subdued, and there is a risk of a resurgence of coronavirus cases, which could lead to more local or nationwide lockdowns.

Such a resurgence is looking increasingly likely. USA Today and other outlets are already reporting on a fall virus surge in the U.S., where total cases hit the 8 million mark on Friday, and 41 states have seen higher case counts during the past week. Bloomberg reported that cases are surging in Europe, especially in Paris and London, which are trying to avoid nationwide lockdowns.

The Moody’s report is the first in a series tracking the increase in credit losses for a sample of large banks spanning North America, Europe and Asia-Pacific. Its sample consists of four large banks in each country: Bank of America, Citigroup, JPMorgan Chase and Wells Fargo in the U.S.; HSBC, Barclays, Lloyds Banking and NatWest in the U.K.; and Australia & New Zealand Banking, Commonwealth Bank of Australia, National Australia Bank and Westpac Banking in Australia.