Large UK domestic banks’ core profitability will partially recover from 2021 onwards, while asset quality is expected to deteriorate from current high levels, Moody’s Investors Service said in a report today.
Although banks’ capitalization will remain robust, the negative impact of the coronavirus on their creditworthiness will increase in line with the severity and overall duration of the crisis.
Moody’s scenario analysis explores how the coronavirus downturn could affect UK banks’ creditworthiness over the 2020-2022 period by drawing on econometric and financial models in order to project banks’ financial metrics.
“Large UK 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 UK and Lloyds Bank: we estimate their problem loans will rise 330 and 320 basis points respectively” says Alessandro Roccati, Senior Vice President at Moody’s Investors Service.
“Problem loans will increase due to weaker economic activity and a rapid rise in unemployment. In aggregate, we
estimate problem loans will rise 270 basis points to 4.1% of gross loans on average.”
Profitability will recover across 2021-22, as the non recurrence of large conduct costs will outweigh a tripling of credit provisions and charges.
Capital levels will remain stable over the 2020-2022 period and broadly in line with end-2019 levels. Government guaranteed loans and relatively moderate loan growth will help to offset risk-weighted asset (RWA) inflation throughout 2020 and beyond.
The overall credit impact of the coronavirus on large UK banks will depend on how much their asset quality and profitability will decline over the next three years. These preliminary assessments are subject to change, however, especially if capital will materially deteriorate over the next two to three years, an occurrence which would significantly slash the odds of bank profiles returning to pre-crisis levels.