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UK banks’ profits slashed by more than half

Big UK banks’ profits have slid by more than half over the last year, according to a ranking of the world’s largest lenders published today.

UK lenders included in The Banker’s top 1,000 World Banks 2021 experienced a 53 per cent drop in profits.

Losses were attributed to the severe damage the pandemic has inflicted on the UK economy and Brexit uncertainty.

The ranking is based on Tier 1 capital, a key measure of banking strength.

Joy Macknight, editor of The Banker, said: “The UK banking industry has faced significant headwinds over the course of the past year, with the impacts of the Covid-19 pandemic and Brexit uncertainty weighing profitability down.”

HSBC sole European bank in top 10

HSBC is the only European bank to rank in the global top 10 list for the tenth successive year.

The top five ranking UK banks all saw pre-tax profits drop sharply over the last year.

HSBC lost 34.2 per cent, while Barclays’s pre-tax profits slid 28.72 per cent.

Lloyds Banking Group absorbed the harshest hit to pre-tax profits of the top five UK banks, down 71.72 per cent.

Standard Charter lost 56.56 per cent and NatWest Group shifted from profit to loss.

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HSBC was the only European lender to rank in the top 10

Global banking powerhouses shake off pandemic pressures
The rankings show the world’s largest banks have remained resilient in the face of the pandemic-induced economic decline.

The world’s largest lenders added 12.7 per cent to their collective Tier 1 capital, reaching $9.9trn, a record high.

Total assets rose 16 per cent, to $148.6trn, while deposits grew 17.1 per cent, to $93.9trn.

Macknight added: “Although profits have shrunk across the globe and many banks’ balance sheets are loaded with allowances for expected loan losses, the world’s banking industry has held up remarkably well and is better capitalised than ever before.”

The banking sector has also performed better during the pandemic compared to the financial crisis.

The top 1000 banks’ combined profits fell 19.2 per cent year-on-year, significantly lower than the 85.3 drop per cent in 2009.

European banks suffer from low rates

Poor economic growth and a record low interest rate environment put downward pressure on Western European banks’ profitability.

Of the largest European economies, banks’ aggregate pre-tax profits contracted 43.71 per cent in Germany, 75.72 per cent in Italy and 47.67 per cent in the Netherlands, while France fell 11.61 per cent.

Spain notched negative pre-tax profits, driven by two of its largest banks, Banco Santander and Bankia, moving from profit to loss.

China now holds almost double the volume of Tier 1 Capital ($2.96trn) as the US ($1.58trn), despite having fewer banks than the US in the rankings.

Profits grew 5.2 per cent in China, compared to a 31.5 per cent and 41.8 per cent drop in the US and Western Europe respectively.

By Jack Barnett

Source: City AM

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UK banks likely to hold fire on home repossession after pandemic, say analysts

Repossessing homes will become harder for UK banks seeking to recover properties when borrowers fail to keep up with payments on mortgages in the wake of the coronavirus pandemic, said analysts.

Recent guidance from the Financial Conduct Authority, or FCA, told banks to offer a range of “tailored repayment options” to mortgage borrowers affected by the coronavirus after the existing scheme offering a three-month payment holiday is withdrawn at the end of October. Customers will still be able to claim a three-month mortgage payment holiday, which in some cases could be their second or third deferral, up until the deadline.

So far 2 million mortgage holders have taken advantage of the payment holiday scheme, according to UK Finance, which represents banks. Among the U.K.’s largest banks, Lloyds Banking Group PLC had granted around 472,000 mortgage holidays as of June 30, while some 240,000 of NatWest Group PLC-provided mortgages were paused, according to data compiled by S&P Global Market Intelligence.

Though the FCA said banks and building societies will return to the tailored support they provided under its normal rules, the regulator also said lenders’ approach needs “to reflect the uncertainty and challenges” that many customers will face in the coming months.

This could see lenders take a different approach to borrowers who are struggling more than they did in previous crises, said Numis Securities analyst James Hamilton.

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“The banks will have to make decisions about how to deal with borrowers who lose their jobs, but also those who are ‘underemployed’ — customers who normally work on commission or bonuses, for instance, who have not been able to work as normal during the pandemic. Banks will have to decide whether to support borrowers who may have been in a good job for years but in a sector which has undergone profound change as a result of the pandemic, like cabin crew staff for airlines,” he said.

New social contract

Banks are likely to take a more nuanced approach to borrowers who find themselves in financial difficulty than they might have done in the past, as the FCA’s proviso on the need to reflect the uncertainty of the pandemic indicates, said Hamilton. In an era of low interest rates, banks are likely to offer some borrowers in trouble the chance to switch to an interest-only mortgage as an alternative to forbearance, for instance, he said.

However, lenders are likely to take a cautious attitude to repossession of properties where borrowers fail to pay.

“There were virtually no repossessions during the credit crisis, unlike in the recessions of the 1980s and 1990s,” said Hamilton. “Lloyds, the biggest mortgage provider, was state-owned then and the government made it quite clear that mortgage-holders were also voters so overall there were relatively few repossessions. Banks will have to be very careful about repossessions and since courts have been closed there’s likely to be a delay before legal action commences in earnest.”

John Cronin, analyst at Goodbody Stockbrokers, agrees with Hamilton, stating in a note to investors that the FCA’s guidance could herald a new approach for banks.

“We think a new social contract is emerging — the pain taken by certain segments of society will not be tolerated by the political system and someone will have to pay. We think repossessions will be more difficult, banks will have to work harder than ever with customers to achieve reasonable forbearance measures,” wrote Cronin.

Credit scores

Banks are likely to see a rise in mortgage forbearance when the regulator-approved mortgage holiday payment scheme ends next month.

“Undoubtedly, there will be more forbearance, when borrowers pause or reduce their payments, as the payment holiday scheme comes to an end. I don’t know anyone who thinks any differently,” said Hamilton.

S&P Global Ratings said it estimates that between 55% and 90% of U.K. borrowers have resumed paying their residential mortgages following payment holidays related to the economic impact of COVID-19.

The FCA noted that while the majority of customers who have had a payment holiday are expected to resume full repayment, “many will remain in financial difficulty.” It also said that while the payment holiday scheme will finish at the end of October, it “will keep this under review depending upon how the wider situation develops.”

The FCA warned banks that they should not take a “one size fits all” approach, and said the range of options that could be offered to struggling mortgage holders included extending the repayment term or restructuring the mortgage, while those borrowers most at risk should be referred toward debt advisory services.

Those mortgage holders taking payment holidays will see their requests reflected in their credit files, which could affect their creditworthiness. This is despite the government and the FCA initially telling consumers that a payment holiday would not affect their credit scores, which affects eligibility for future loans.

There has also been a change in approach to mortgage payment holidays by the Bank of England. When the scheme was first introduced, the BoE wrote to mortgage providers explaining that since coronavirus-related payment deferrals were being made widely available and were therefore not based on individual financial circumstances, they were not necessarily good indicators of significant increases in credit risk, credit impairments or defaults.

Marker of risk

However, following the FCA’s latest announcement, the BoE said that the tailored forbearance arrangements for borrowers who are not able to resume payments in full immediately after their payment holiday ends is as good an indicator of a significant increase in credit risk as forbearance was prior to the pandemic.

The FCA’s guidance comes as the U.K. mortgage market shows signs of recovery. The BoE said mortgage lending increased 6.74% month over month in July to £17.4 billion, though it was down 18.1% year over year. House prices were up 3.7% in August compared with a year previously, according to Nationwide Building Society’s House Price Index.

“House price rises might be hitting the headlines now, but in the second or third quarter of next year, it’s going to look very different,” said Hamilton.

By Jon Rees

Source: S & P Global