UK Banks Could Require Up to £5 Billion Provisioning for Potential Bad Loans

The surmounting economic adversity in the United Kingdom would lead to a significant amount of banking loans going bad this year. A ballpark estimate provided by the major banks in the country puts a figure of £5 billion that they must come up with provision to adequately cover for the potential non-performing assets that are expected to swell in their books. While the banks are already expected to perform badly this year due to a significant drop in their business activities, this news comes as another blow to them. The situation, however, would very likely be restricted to only the pre-existing loans of these banks, as most of the loans that would be going forth during the pandemic period will have bank guarantees and would be significantly less risky. The outbreak of the coronavirus pandemic in the United Kingdom has created unprecedented healthcare and economic situation in the country. The pandemic till date has infected nearly 152,000 people out of which around 20,500 have already lost their lives. Taking stock of the deteriorating situation in the country the British government had imposed a lockdown in the country last month which had led to the closure of most of the business establishments in the country, incurring massive losses thereby. The British Banks though were adequately prepared to deal with a potential shock prior to the outbreak, but the magnitude of the economic shock that has been inflicted was unforeseen and what impact it will have on the country’s banking system in months to come remains to be seen.

Among the topmost banks of the country who are expected to come out with their provisional numbers include the Royal Bank of Scotland, HSBC, Lloyds, Barclays and Standard Chartered. In February when the pandemic had just made its presence felt in the country, HSBC has put an estimate of $600 million in provisioning, but now as the situation has deteriorated, the bank is expected to report provisioning of $1.8 billion. Similarly, Standard Chartered is expected to announce provisioning of $622 million, while its majority of the business is located in Asia, Africa and the Middle East. Lloyds is expected to set aside a provision of £1.1 billion, whereas RBS is expected to put in nearly £515 million in provisioning for this extraordinary situation. However, the second-largest provisioning, after HSBC is expected to be put in by Barclays, which is expected to put in as much as £923 million in provisioning. These above numbers are only market consensus estimates and could very well change for the good or for the worse when these banks actually come out with their actual numbers. The second most important thing about these numbers is that they are only for this quarter, and the provisioning could very well increase as we go into the year further. Many experts point out, however, that this time around the British Banks are much better prepared to deal with the crisis than they were at the time of the Financial crisis of 2008.

For the Banks in the United Kingdom, the hit of the pandemic was not as hard as the other industrial sectors. As the country was coming out of the European Union, sufficient preparations had been made to deal with the banking system to deal with any eventuality arising out of the fallout of Brexit. The Bank of England had conducted stress tests of the banking system and had satisfactorily assured itself that the banking system was ready for any eventuality being dealt with it as a fallout of Brexit. However, little was known then that the preparations would come in handy to a far more disastrous situation, and it can also be said that it is in great luck of the country that the government was already planning a massive public expenditure programme even before the pandemic hit. As the lockdown situation in the country progressed, it started becoming increasingly clear that business activity levels in the country are going to deteriorate. The banking system which was just starting to experience an upward trajectory in its credit take off’s was halted on its tracks by the pandemic. The provisioning of £5 billion pounds is not a significant sum compared to the bailout funds being extended by the British government to its industries to deal with the crisis. The situation, however, brought in mixed fortunes for the Banking industry as the month of March came by. While the lockdown situation forced most of the banks in the country to work at reduced efficiency levels on account of the government-imposed conditions, the month also brought some good news for the Banks in the form of government’s credit guarantee scheme. The British government on 18^th of March launched a massive credit guarantee scheme to support the companies in the country to tide over the ongoing crisis. The government instructed the Bank of England to extend the guarantee on loans being taken by large companies in the country to finance their staff’s salary expenditures and other important provisions while they struggle with the business slowdown. The guarantee though only extendable for new loans sought by the companies made the operating environment much more relaxing for the banking industry than what it would have been if the guarantee would not have been extended. However, it is not only the Bank of England guarantee, but other measures taken by the banks themselves, which would come in handy for a less than expected rough trading conditions for the banking system during this crisis. In order to reduce the burden of the bad loans in their books, several banks had already extended interest and instalment payment holidays for their mortgage clients even before the government loan guarantee scheme was announced. The mortgage interest and instalment repayment holiday would give many of the clients of these banks much needed breathing space to make the payments rather than putting extra burden on banks to deal with a large number of ensuing foreclosure proceedings.

The British Banks are much better placed in comparison to many of their global counterparts in terms of their stress sustaining levels. The continued government support is likely to ensure that the operating environment does not deteriorate further for these banks. However, in the next quarters, how things will pan out depends to a large extent of how successful the NHS is in containing the pandemic and how soon the government is able to open up the country out of the lockdown.