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Banks expected to set aside billions to cover bad loans

Lloyds, Barclays and NatWest will all present results next week.

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All but one of the UK’s four biggest banks present figures next week (Dominic Lipinski/PA)

All but one of the UK’s four biggest banks present figures next week (Dominic Lipinski/PA)

All but one of the UK’s four biggest banks present figures next week (Dominic Lipinski/PA)

Analysts will be racing to find out what bad loans will cost Britain’s lenders as all but one of the UK’s four biggest banks present figures next week.

The banks are expected to write off billions in loan impairments for the second quarter of the year, following a similar move across the pond.

The big four Main Street banks in the US took 33 billion US dollars (£25.8 billion) in charges to cover the loans they think could go bad from the second quarter – the highest figure since 2009 amid the financial crisis, said AJ Bell investment director Russ Mould.

Barclays already took a £2.1 billion charge for potential losses in the first quarter of the year, and analysts are now expecting an additional £1.4 billion hit on Wednesday.

As per the first quarter, we expect a chaotic mix of divergent assumptionsEdward Firth and Frederique Sleiffer, KBW analysts

“To give Barclays its due (its investment banking arm) performed strongly in the first quarter and it should really have made hay between April and June, too,” Mr Mould said.

“A further strong performance should lessen the heat a little on chief executive Jes Staley, whose commitment to the investment bank seems unwavering, despite the pressure brought to bear by activist investor Sherborne, which has called for capital to be taken away from investment banking and allocated to other areas of the bank where returns are less volatile.”

Mr Staley has often argued in favour of the investment arm, which is able to shoulder some of the burden in a crisis when retail banking struggles, as is happening today.

Similar impairments are expected at Lloyds, which analysts believe will take a £1.5 billion hit from bad debt in the second quarter of the financial year in its results on Thursday.

It comes on top of a £1.4 billion charge in the first quarter of the year.

But the consensus, which is an average, hides a lot of variation in many of the impairment predictions for most of the banks.

For instance, experts at Keefe, Bruyette & Woods think Lloyds might present an impairment of more than £2 billion for the quarter – something that could push the bank into a loss.

While the analysts are trying to figure out what the banks will set their impairments at, even the figures that the banks themselves will present will just be an educated guess.

The forward-looking measures are much more about what banks expect will happen, rather than based on lost business today.

“We expect second-quarter results will be largely meaningless in determining the long-term value of UK banks,” said KBW analysts Edward Firth and Frederique Sleiffer.

“As per the first quarter, we expect a chaotic mix of divergent assumptions.”

At Royal Bank of Scotland, bosses are preparing for their first set of results under the new name NatWest Group on Friday.

If the analyst consensus is right, then chief executive Alison Rose will have to deal with a £943 million impairment.

Nicholas Hyett, an equity analyst at Hargreaves Lansdown, said: “NatWest has a relatively large number of small business customers – so we might expect a reasonably high level of defaults. It’s early days though, and with significant provisions for bad loans already in place, more would be a bad sign.”

The impairments come off the back of the coronavirus lockdown and the effect this will have had on many businesses and individuals across the country.

Much of the impairment is unlikely to find itself to any bank’s balance immediately, but will instead come over time.

The banks reacted at record speed to pump out billions in loans to Britain’s businesses.

Between them, lenders have granted around £48 billion in loans under three different loan programmes.

Much of this is guaranteed by the Government.

Standard Chartered will also report on Thursday, Santander on Wednesday and Virgin Money on Tuesday.

PA