Britains largest banks could have to put aside nearly £5bn to help cover potential loan losses in the first quarter, amid fears that the economic downturn caused by the Covid-19 outbreak will make it harder for borrowers to repay their debts.
This week HSBC, Lloyds, Barclays, Royal Bank of Scotland and Standard Chartered will reveal how the pandemic and resulting lockdowns hurt their balance sheets during the first three months of the year.
HSBC is expected to report the largest provision among its peers when it releases first-quarter earnings on Tuesday, with consensus estimates pointing to a $1.8bn (£1.4bn) charge.
That is nearly three times the $600m that HSBC said it may have to put aside in February, when the disease was still largely contained in Asia and hitting the banks largest market in Hong Kong. Analysts are now expecting HSBCs first-quarter profits to more than halve, from $6.2bn to $2.9bn.
The London-headquartered lender Standard Chartered is expected to take a smaller hit as its customer base is primarily based in Asia, the Middle East and Africa. Consensus estimates suggest it will put aside $622m (£502m) in the first quarter, having already warned that it would miss financial targets for 2020. Pre-tax profits are forecast to fall by a third, to $796m.
Domestic banks in the UK have been scrambling to grant mortgage and credit card repayment holidays to retail customers and dole out government-backed loans for small businesses hit by the outbreak. While the measures will provide temporary relief, there are questions over whether borrowers will be able to afford repayments once the holidays expire.
That uncertainty could result in Lloyds setting aside around £1.1bn worth of impairments, according to analysts at UBS, who expect Lloyds profits to fall by 77% to £363m.
RBS, which will soon be renamed NatWest, is expected to take a £515m charge, according to consensus forecasts, though some estimates are as high as £888m. It is expected to push attributable profits down by more than 70% to £200m.
Forecasts also show Barclays may have to put aside around £923m to cover loan losses and any other charges, pushing pre-tax profits down by 20% to £1.2bn.
While some analysts expect the bulk of UK bank provisions will be put aside for business loans, Barclays may end up having to put more aside for its credit card division, which is exposed to both the UK and US markets. Barclays is one of the top-10 credit card issuers in the US, where more than 26 million workers have lost their job in the last month.
Jason Napier, a banks analyst at UBS, said investors were still shooting in the dark as they try to predict the full fallout of the Covid-19 crisis. “Though Covid-19 infection curves seem to have peaked in a number of countries, investors have no hard data to gauge the damage this shock will do to the banks,” he said.
New accounting models being phased in across UK banks mean they are likely to take more of their charges upfront, but not to the same extent as US banks, which operate on a different standard. “Theres potential for very significant charges to be taken in a short space of time,” Napier warned.
This month JP Morgan set aside $8.3bn (£6.6bn) to cover potential loan losses, saying it expected a “fairly severe recession” due to the outbreak. That was followed by a £1bn charge by Goldman Sachs, which nearly halved its first-quarter profits.
However, Napier said UK banks were much better placed to weather a downturn than they were at the start of the 2008 financial crisis.