Western banks brace for loan loss surge

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Loan losses are set to rise at the largest banks in the UK, the US and Australia as the impact of Covid-19 pushes many countries into recession leading to a deterioration in credit conditions, according to a report published by Moody’s Investors Service on October 15.

Exposed sectors such as retail, hospitality and aviation, as well as unsecured lending, are expected to generate most pandemic-related credit losses.

The Moody’s report is part of a series tracking the increase in credit losses for a sample of large banks spanning North America, Europe and Asia-Pacific.

UK banks hit hardest

UK banks are expected to see the largest rise in non-performing loans (NPLs) because of a sharper economic contraction, and high volume of loans showing signs of deterioration, according to Moody’s.

Moody’s forecasts the UK’s real gross domestic product will contract by 10.1% in 2020 as a result of the pandemic, more than the US (-5.7%) and Australia (-5.3%).

However, the rating agency said that UK banks will not necessarily report the biggest rise in loan losses, as some NPLs will relate to restructured loans and not to defaulted exposures that require a write-off.

According to the Moody’s report, Australian banks collateralised residential mortgages focus provides a buffer allowing them to report a more moderate rise in provisions despite higher exposure to at risk sectors. As credit quality deteriorates further, these banks’ provisions will remain high, the report stated.

US banks’ loan losses, meanwhile, will largely depend on unemployment trends, as they have greater exposure to unsecured consumer credit due to their sizeable credit card portfolios which are expected to be adversely affected by rising unemployment in 2021.

Moody's chart

Chart: US banks like Citi and JPMorgan (JPM) have high exposure to unsecured personal loans and credit cards.

NPL risks rising

Across the largest banks in Australia, the UK and the US, growth in NPLs has so far been limited, reflecting bank forbearance and government support measures, the report stated.

The formation of NPLs is expected to accelerate as government stimulus and bank forbearance expire, to be followed by higher loan write-offs. However, the volume of additional charges could be lower given the significant provisions already taken to date.

“The growth trajectory of banks’ loans losses remains uncertain, given the moderating effect of government support and bank forbearance, coupled with uncertainty over the pace of the economic recovery,” said Laurie Mayers, associate managing director at Moody’s Investors Service.



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