The COVID-19 pandemic could end up costing UK banks £25bn ($31bn) in 2020, a top rating agency has forecast.
Fitch Ratings said this week that UK banks may have set aside between £17bn and £25bn in 2020 to cover ballooning losses caused by the pandemic.
Fitch based its forecasts on first quarter results published by UK lenders over the last two weeks. In the first three months of the year the UK’s biggest banks set aside a combined £7bn to cover rising losses — more than the sector provisioned for losses in the whole of 2019.
Fitch’s forecast covers Lloyds (LLOY.L), Barclays (BARC.L), HSBC (HSBA.L), RBS (RBS.L), and Santander (SAN.MC). HSBC has made the biggest loss provision so far, setting aside $3bn, while Santander UK took the smallest hit, provisioning just £122m for expected losses.
“Given uncertainty around the economic and health crisis, there is a wide range of possible outcomes, as indicated by some of the banks’ guidance and model assumptions,” Fitch analysts wrote.
“All banks expect that the UK economy will deteriorate sharply in 2020, but the assumed depth of the downturn and shape of the recovery varies.”
The Bank of England said on Thursday (7 May) the UK’s financial system had “more than sufficient” capital to withstand a severe downturn. The central bank said a stress test modelling a 30% drop in second quarter GDP showed UK banks losing £80bn but would only eat up 45% of capital buffers.
However, the central banks said banks must keep lending or face an even sharper economic downturn as more businesses go bust and set off a chain reaction of defaults.
The Bank of England said GDP could decline by 14% across 2020, marking the worst downturn in 300 years.