22 June 2020

FT: Bank loan losses: bouncing back

Lenders will come under pressure as state support for business winds down. UK banks helped to stave off economic ruin in the first wave of coronavirus-related financial distress. The next wave could pose a problem. As state support for business winds down, lenders will come under pressure.

 

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So far, UK company liquidations have been voluntary and limited to small-scale enterprises thanks to the £50bn in business loans provided by banks, alongside £20bn in government employment support.

Consumers have received help via furlough schemes and payment breaks on mortgages and loans. The UK government’s ban on commercial evictions and formal creditor action is due to end first. Furlough scheme limits will be introduced in August. Lending schemes will be phased out afterwards. The Coronavirus Business Interruption Loan Scheme ends in September. Bounce back loans, the UK’s most subscribed scheme, is set to finish in November.

Corporate distress as a result of scheme curtailment will mean more loan losses at UK banks. At Lloyds and RBS, loan losses are expected to rise roughly five times to 1 per cent of loans outstanding this year. Small and medium-size enterprises are most at risk. When lockdown measures were first introduced in March, voluntary liquidations of small businesses rose to twice last year’s levels. Of the two banks, Lloyds is most exposed. About a fifth of RBS SME loans have a 2.5 per cent or higher chance of default, thinks Barclays. The value of such loans is closer to a third at Lloyds. more at FT £

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