British banks granted a higher proportion of payment holidays, as a percentage of loans, than most other banks in Europe during the coronavirus pandemic, but such moratoria have now dropped sharply.
Lloyds Banking Group PLC's peaked at 14%, and NatWest Group PLC's at about 9%, said Fahed Kunwar, an analyst at equity research firm Redburn, noting that British banks tended to have a larger proportion of mortgages as a proportion of their entire lending stack. The European Banking Authority said this week that, as of June, about 6% of banks' total loans and close to 7.5% of total loans to households and non-financial companies had been granted moratoria on loan payments — a nominal loan value of €871 billion.
"U.K. payment holidays have fallen by more than two thirds overall since March," Kunwar said. "The payment holidays that are mortgage-related are the ones that have dropped the sharpest — partly because a lot of mortgage customers were just being cautious," said Kunwar.
At NatWest, initial mortgage holidays declined from £33.6 billion of mortgage lending, or 22% of the book, to £21.3 billion at the end of June and to £6.2 billion, or 4% of the book, at the end of September. CEO Alison Rose said 85% of mortgage holidays had now ended.
"The number of customers taking mortgage repayment holiday has been steadily decreasing and trends suggest they acted through caution at the start of the pandemic rather than need," she said.
In the confusion surrounding COVID-19 in the U.K. in March this year, customers took the chance of a payment holiday for fear of worsening economic conditions to come, said analyst Gary Greenwood of Shore Capital.
"A lot of it was opportunistic — people were panicking, they didn't know what was going on. But I think of lot of people saw it as a 'freebie' and didn't necessarily realize that that wasn't the case," he said.
Certainly, those mortgage holders taking payment holidays will see their requests reflected in their credit files, which could affect their creditworthiness. This is despite the government and the Financial Conduct Authority initially telling consumers that a payment holiday would not affect their credit scores, which affect eligibility for future loans.
"The vast majority of the people at the end of their payment holidays have started paying again. Banks throughout the third quarter were reporting that underlying defaults were pretty benign; if anything they were slightly improving," said Greenwood.
He noted that there has yet to be a significant jump in unemployment since the government job-support scheme has been extended from its initial cut-off date of the end of October. Mortgage payment holidays were due to end on that date, too, but have also been extended for six months.
"There's no evidence from the banks that, when that scheme was originally scheduled to end in October, people were starting to take up the scheme again," said Greenwood.
Lloyds' CFO William Chalmers said more than 80% of customers who took an initial payment holiday are now repaying, up from about 70% at the half year. In total at Lloyds, payment holidays were granted on about £69 billion of retail lending but the bank has less than £15 billion of that outstanding, while payment has been missed on £2.4 billion of lending.
"Our market share of mortgage payment holidays is now below our natural market share; around 30% of extended mortgage payment holidays have also now expired with around 90% resuming payment," he said on a third-quarter earnings call.
Lloyds said about 35% of outstanding payment holidays are already in Stage 2 impairment, where the lifetime expected credit loss is recognized. Chalmers said moving the remaining population of extensions across all assets to Stage 2 would generate an incremental expected credit loss of less than £100 million.
Lloyds said it was seeing a similar picture on SME capital repayment holidays, where, in any case, more than 90% is secured lending.
Arrears are "low" at just under 4% of matured payment holidays, which includes missed first payments, Chalmers said.
Barclays, HSBC, Santander
Barclays PLC said balances outstanding on mortgage payment holidays was £4.4 billion, or 3% of its £145 billion mortgage balance sheet exposure, with an average loan-to-value of 63%. Mortgage holidays were granted for 123,000 accounts, but in September balances outstanding at the bank were 79% lower than the peak in May.
"It's not really a credit issue for us, I think, at this stage, unless that will change, of course, but I think that's broadly behind us," said Tushar Morzaria, Barclays' group finance director, at third-quarter earnings.
Noel Quinn, CEO of HSBC Holdings PLC, said borrowers had returned to full payment more quickly than expected.
"Some of the government schemes have unwound, payment holidays have unwound," he said at third-quarter earnings. "We are seeing a better performance on that unwind of government schemes than we had previously modeled or expected, and people are reverting to normal payment patterns at a higher percentage than we had originally modeled."
Santander UK PLC gave over 340,000 payment holidays on mortgages, loans and credit cards and said 3% of loans are in arrears after the end of payment holidays. It granted 244,000 mortgage payment holidays on loans totaling £37.1 billion with £4.8 billion of loans with payment holidays still outstanding and 1% of customers new to arrears after their payment holiday ends.
It is unlikely that a borrower who did not take a payment holiday previously would now take one, said Redburn's Kunwar.
"I think the tail risk that was there from these really quite large numbers has ... receded," he said.