UK banks ready for $22 billion loan losses as outlook dampens

British banks cut back their outlook for the year further than most of their European peers in the second quarter earnings report as the COVID-19 pandemic, Brexit, and low interest rates led them to prepare for “worst-case” scenarios in their risk models.   

Banks such as Barclays, Standard Chartered, Lloyds, NatWest Group, and HSBC underperformed despite investor optimism for the half-year results.

Overall provisions for potential loan losses amounted up to $22 billion, a much larger amount than analyst forecasts. The figures mounted on selling pressures for shares which were already pummeled by the pandemic.

All five UK banks have underperformed, falling between 42% and 55% this year compared to a 36% fall in the European banking index.

The British economy is expected to contract by 11.5% in 2020, with the Euro falling by 9.1%, according to OECD forecasts in June.

Other factors piling pressure on UK banks include the relatively higher exposure to unsecured consumer lending, a sharp drop in central bank rates, and the prospects for a “no deal” Brexit transition.

In addition, the tightening of lockdown measures across the UK also threatens to prevent a swift economic recovery in the country.