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UK banks may slow loan loss provision releases as economic risks mount

Britain's biggest banks will be wary of releasing significant levels of loan loss provisions at forthcoming third-quarter results amid concerns over bumps in the economic recovery, analysts said.

Uncertainty created by issues including supply chain bottlenecks, soaring energy prices and the end of COVID-19 government support schemes means lenders are now likely to maintain more of the management adjustments designed to mitigate shortcomings in their loan loss models. In the first half of the year, banks slashed impairments as the U.K. economy rebounded faster than expected, fueling a jump in profits.

"I think we'll see a marked reduction in the quantum of write-backs relative to the second quarter," said John Cronin, analyst at stockbroker Goodbody, in an interview. "There is definitely wider hesitation on a bank board level to push through anything overly substantive."

Leading U.K. banks will report earnings in the coming days, beginning Oct. 21 with Barclays PLC, which cut loan loss provisions by £797 million in the second quarter.

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Write-backs will only be "gradual or later, with 'furlough uncertainty' likely to be a popular excuse," said Investec analyst Ian Gordon. As such, balance-sheet provisions may only "come down a bit," he said.

Furthermore, supply chains issues have arisen, affecting fuel and food deliveries as a result of a lorry driver shortage. Bottlenecks at ports have also resulted in a huge build up of goods waiting to be delivered.

Soaring wholesale gas prices across Europe have prompted a sharp spike in energy costs for businesses and consumers, with a number of smaller British energy companies going bust while larger energy-intensive manufacturing firms have requested government aid to continue.

"What we're seeing now plays into the banks' view that they need to be relatively cautious," said Richard Barnes, senior director for financial institutions at S&P Global Ratings. "We could see some releases in the third quarter, but I think those would continue into the fourth quarter and early next year."

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Lenders warned at second-quarter results that they expected to release adjustments gradually. NatWest Group PLC cut its post-model adjustments for economic uncertainty by £53 million to £834 million, with group CFO Katie Murray stating at the time that economic conditions during the rest of the year would be key to the speed at which the bank would make further reductions.

"The major factor will be how the economy and our customers react to the ending of government support," Murray said. "But as long as economic and credit conditions continue to trend favorably, there could be some upside later this year and into 2022."

Banks remain very strongly capitalized thanks to soaring deposits during the pandemic and access to cheap lending via state-backed programs. NatWest, for example, recorded a common equity Tier 1 ratio of 18.2% in the first half of the year, far above its regulatory requirements.

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They have also already returned cash to shareholders via share buybacks, with Barclays announcing a program of up to £500 million at its second-quarter results after completing a £700 million repurchase in April. Banks, therefore, should not feel under inordinate pressure to announce new large-scale write-backs so soon, said Cronin.