British banks write off $31 billion in first-half mayhem

LONDON (BLOOMBERG) - British lenders have offered a taste of how much the worst recession in centuries is going to cost. The bill's already at £17.2 billion (S$30.95 billion).

Write-offs at the country's six biggest banks so far this year roughly equal Barclays Plc's current market value.

"There's likely more of that to come, and with low interest rates dragging on revenues, full-year profits will not be pretty," said Mr Nicholas Hyett, analyst at Hargreaves Lansdown Plc.

The provisions are required under accounting rules, but also reflect concerns about how British households are going to cope with what the Bank of England has said could be the worst downturn in 300 years.

For some borrowers, "servicing will become more difficult", said Ms Katie Murray, chief financial officer at NatWest Group Plc, which booked £2.1 billion in charges in the second quarter.

Lloyds Banking Group Plc's profit for the period was wiped out by a £2.4 billion provision.

"Coronavirus has changed many things," chief executive officer Antonio Horta-Osorio said.

Lloyds expects to set aside between £4.5 billion and £5.5 billion this year, hinting that the largest provisions have already been taken.

Four months ago, HSBC Holdings Plc put the top estimate on provisions this year at US$11 billion (S$15.13 billion).

This week, Europe's largest bank said the cost could now reach US$13 billion as the global economy deteriorates.

The largest single source of the increase was the UK, which accounted for US$1.45 billion of the US$3.8 billion of the group's second-quarter charge.

"Cost cutting is likely in Europe and the US and we would not rule out a breakup option being considered," said Mr Gary Greenwood, analyst at Shore Capital, as he weighed up the options for HSBC in the face of mounting pandemic costs.

Barclays took a £1.6 billion charge, more than analysts anticipated.

"There has been extraordinary economic contraction, especially in the US and UK," chief executive officer Jes Staley said.

The bank, whose bleak outlook was counterbalanced by a surge in trading gains, said impairments in the second half would begin to fall.

These predictions on future provisions depend on how the economy fares as British leaders try to reopen the country while avoiding a feared winter spike in Covid-19 cases.

HSBC said that in its worst-case scenario, UK GDP could fall 9.6 per cent this year.

It assigned a 10 per cent probability weighting to its view - the highest chance it has given any country for such a dire performance.

If British unemployment reaches 7 per cent, Deutsche Bank AG analysts have estimated UK banks might book as much as £40 billion in provisions over two years.

One of the gloomiest reactions to the UK's prospects came from Spain.

Banco Santander SA wrote down the value of its UK subsidiary by €6.1 billion (S$9.89 billion), wiping out almost all of the value previously ascribed to the business and accounting for more than a third of the provisions taken by the Spanish lender in the last quarter.

Shares in Britain's consumer-facing banks - HSBC, Barclays, Lloyds and NatWest - have all performed worse than their European peers this year.