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MarketScreener Homepage  >  Equities  >  London Stock Exchange  >  Barclays Plc    BARC   GB0031348658

BARCLAYS PLC

(BARC)
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Britain's banks brace for $22 billion loan losses as outlook darkens

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08/05/2020 | 12:34am EDT
FILE PHOTO: HSBC and Barclay's buildings are lit up at dusk in the Canary Wharf financial district of London

Britain's banks took a gloomier view than almost all their European peers in their second quarter earnings, as coronavirus fears, Brexit and low interest rates caused them to bake tougher "worst-case" scenarios into their risk models.   

Investors had expected a torrid set of half-year results, but Barclays, Standard Chartered, Lloyds, NatWest Group and HSBC fell short of these low expectations.

Provisions for potential loan losses across the five banks topped $22 billion, blowing past analyst forecasts and increasing selling pressure on shares already hammered by the pandemic this year.

By contrast, France's BNP Paribas and Credit Suisse beat analyst forecasts, benefiting from bumper trading volumes as well as relatively modest provisions.

HSBC and Lloyds were punished for poor results, with shares in both banks plumbing their lowest levels in 11 and 8 years respectively.

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

"The UK banks are facing a more significant economic drop than most Europeans as the UK has faced a bigger shock from the COVID-19 pandemic, and that has fed through into provision levels," said Patrick Hunt, partner at consultancy Oliver Wyman.

The British economy is forecast to shrink 11.5% this year, while the euro area contracts 9.1%, according to OECD forecasts in June.

Other factors weighing on UK banks include a relatively higher exposure to unsecured consumer lending, a larger drop in central bank rates and the potential for a "no deal" exit from Brexit transition arrangements at the end of 2020, analysts said.

The roll out of further lockdowns across the north of England in response to a rise in infections also threatens to derail the country's nascent economic recovery and damage bank balance sheets further.

TOUGH CHOICES

NatWest and Lloyds gave guidance that loan-loss provisions should be lower in the second half of the year, raising hopes the country's banks may have "kitchen sinked" provisioning and got ahead of European rivals.

But they also warned the outlook could deteriorate further and drastically downgraded their worst case forecasts for the economy, predicting GDP drops of as much as 17% in 2020.

The heftier provisioning among British banks relative to their European rivals was largely because the former incorporated gloomier worst-case forecasts into their economic models.

Lloyds, for example, said Britain's GDP could tumble 17.2% in a worst scenario compared with a 7.8% fall previously modelled as the extreme downside case when the bank reported results in April.

While European rivals did not disclose their models in as much detail, Deutsche Bank allowed for a more modest 2 percentage point swing to the downside in German GDP from the base case in its adverse scenario.

That disparity is reflected in the yields banks are paying on their debt.

Deutsche Bank's bonds maturing in August 2023 were trading at a yield of 0.03% on Tuesday, 38 basis points lower than a comparable Barclays September 2023 note. In January, Barclays' yield was trading lower than that of its German counterpart.

"Asset quality in the UK appears to be deteriorating faster than in Europe and you are seeing that reflected in the bonds," said Filippo Alloatti, a credit analyst and portfolio manager at Federated Hermes.

NatWest chief financial officer Katie Murray said the bank's worst case took account of both further lockdowns to control the spread of the virus and a disruptive Brexit.

HSBC said its business in Britain, where it took a $1.5 billion charge against expected credit losses, had been particularly hard-hit and it would look to accelerate cost-cutting plans including redundancies.

Tom Merry, head of financial strategy at Accenture, said banks are prioritising cost-cutting and readying restructuring and debt collection operations - including improving credit risk modelling to pick up on red flags - in preparation for a tough second half.

Cost-cutting is likely to include further branch and office closures, Merry said, with any investment spend ploughed in to digital services.

"If there's one good thing to come from this for banks it's that if they are able to accelerate digital transformation they will be stronger out the other side."

($1 = 0.7651 pounds)

(Reporting by Iain Withers and Lawrence White, additional reporting by Abhinav Ramnarayan. Editing by Jane Merriman)

By Iain Withers and Lawrence White

Stocks mentioned in the article
ChangeLast1st jan.
ACCENTURE -0.05% 223.32 Delayed Quote.5.80%
BARCLAYS PLC -0.52% 97.47 Delayed Quote.-45.45%
BNP PARIBAS -2.40% 31.045 Real-time Quote.-39.77%
CREDIT SUISSE GROUP AG -1.60% 9.096 Delayed Quote.-29.46%
DEUTSCHE BANK AG -1.83% 7.131 Delayed Quote.5.13%
EURO / BRITISH POUND (EUR/GBP) 0.46% 0.91156 Delayed Quote.7.80%
FEDERATED HERMES, INC. -1.28% 21.51 Delayed Quote.-33.08%
HSBC HOLDINGS PLC -2.84% 299.85 Delayed Quote.-47.87%
LLOYDS BANKING GROUP PLC -0.94% 26.315 Delayed Quote.-57.45%
NATWEST GROUP PLC -2.00% 105.15 Delayed Quote.-55.35%
STANDARD CHARTERED PLC -2.24% 353.8 Delayed Quote.-49.19%
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Financials
Sales 2020 21 254 M 27 354 M 27 354 M
Net income 2020 636 M 819 M 819 M
Net Debt 2020 - - -
P/E ratio 2020 26,5x
Yield 2020 0,12%
Capitalization 16 998 M 21 848 M 21 877 M
Capi. / Sales 2020 0,80x
Capi. / Sales 2021 0,82x
Nbr of Employees 80 800
Free-Float 99,6%
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Technical analysis trends BARCLAYS PLC
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Mean consensus OUTPERFORM
Number of Analysts 24
Average target price 142,68 GBX
Last Close Price 98,00 GBX
Spread / Highest target 140%
Spread / Average Target 45,6%
Spread / Lowest Target -25,5%
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Managers
NameTitle
James Edward Staley Group Chief Executive Officer & Director
Nigel Paul Higgins Group Chairman
Mark Ashton Rigby Group Chief Operating Officer
Tushar Morzaria Group Finance Director & Executive Director
Timothy James Breedon Independent Non-Executive Director
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