<\/p>\n
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<\/a> caused them to bake tougher “worst-case” scenarios into their risk models<\/a>. <\/p>\n Investors had expected a torrid set of half-year results, but Barclays, Standard Chartered<\/a>, Lloyds, NatWest Group and HSBC<\/a> fell short of these low expectations.<\/p>\n 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.<\/p>\n By contrast, France’s BNP Paribas and Credit Suisse<\/a> beat analyst forecasts, benefiting from bumper trading volumes as well as relatively modest provisions.<\/p>\n HSBC and Lloyds were punished for poor results, with shares in both banks plumbing their lowest levels in 11 and 8 years respectively.<\/p>\n All five UK banks have under-performed, falling by between 42% and 55% this year compared to a 36% fall in the European banking<\/a> index. <\/p>\n “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.<\/p>\n The British economy is forecast to shrink 11.5% this year, while the euro area contracts 9.1%, according to OECD forecasts in June.<\/p>\n 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.<\/p>\n 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.<\/p>\n TOUGH CHOICES<\/p>\n 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.<\/p>\n 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.<\/p>\n The heftier provisioning among British banks<\/a> relative to their European rivals was largely because the former incorporated gloomier worst-case forecasts into their economic models. <\/p>\n 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. <\/p>\n