U.K. banks park £1.3 billion to cover bad loans as recession looms

Some of the U.K.'s biggest high street banks are bracing themselves for trouble.

Barclays, Lloyds Banking Group and NatWest Group have together put aside nearly £1.3 billion ($1.5 billion) to cover bad loans, earning reports this week showed.

Luke MacGregor/Bloomberg

HSBC Holdings, which makes most of its money in Asia, also set aside $200 million "in respect of an uncertain U.K. macroeconomic outlook."

These provisions, the biggest since the COVID-19 pandemic, took the shine off what might have otherwise been a strong set of earnings. Interest rate rises swelled returns on loans and ended more than a decade of vanishingly small margins for retail banks. Rivals in Europe were more wholeheartedly positive about the effects of rates this quarter.

Shares in NatWest dropped by as much as 9.7% on Friday after the firm's profit missed estimates — due partly to the impairment charge — and it warned of a worsening economy. It's the biggest one-day share price decline for NatWest since March 2020, in the early days of the pandemic.

"The market is not in the mood to be surprised," said Fahed Kunwar, an analyst at Redburn.

It was a different story among European banks, which mostly drew cheer from central bank rate increases.
Deutsche Bank delivered its best quarterly profit in more than a decade on Wednesday and said there was upside to its full-year guidance even as Germany faces an energy crunch. The results echoed the performance of Switzerland's UBS Group, which on Tuesday posted a robust quarter as income from lending to its wealthy clients jumped.

Banco Santander also beat expectations on Wednesday, though it acknowledged that the economy was set to "remain challenging." Banco Bilbao Vizcaya Argentaria, meanwhile, saw net profit climb 30% from a year earlier.

U.K. economy

British lenders all lowered their expectations for the economy in the coming year. Their models aren't perfect predictors — they'd penciled in almost no growth in the housing market for last year, when prices ultimately rose by double digits — but the figures do reflect concerns about the financial health of borrowers.

Barclays said on Wednesday that its baseline assumptions for the economy have all declined in the past three months, with the lender now modeling for 0.3% annual growth in U.K. GDP next year, down from 1.7% it was expecting just three months ago. The lender said it had reviewed its corporate loan holdings and was reducing its exposure.

Lloyds said on Thursday that it expects the U.K. economy to shrink 1% next year, with house prices tumbling 7.9%, while its pretax profit fell more than expected.

"The underlying credit environment remains benign but, as with the early days of COVID, the banks are using the flexibility of IFRS 9 provision to build buffers in advance of potential economic deterioration," Joseph Dickerson, managing director at Jefferies International, said in a message on Friday, referring to global accountancy requirements.