articles Ratings /ratings/en/research/articles/210120-bulletin-u-k-bank-rating-actions-won-t-wait-for-the-bank-of-england-s-2021-stress-test-results-11808590 content esgSubNav
Log in to other products

Login to Market Intelligence Platform

 /


Looking for more?

In This List
NEWS

Bulletin: U.K. Bank Rating Actions Won’t Wait For The Bank of England’s 2021 Stress Test Results

COMMENTS

Diverse Rating Actions On European Banks Highlight The Importance Of Robust Business Models To Long-Term Resilience

NEWS

Bulletin: AMP Capital's Potential JV Could Weigh On Group Creditworthiness

COMMENTS

Losing LIBOR: Australia Banks On A Smooth Transition

NEWS

Commonwealth Bank of Australia's PERLS XIII Capital Notes Rated 'BBB-'


Bulletin: U.K. Bank Rating Actions Won’t Wait For The Bank of England’s 2021 Stress Test Results

LONDON (S&P Global Ratings) Jan. 20, 2021--S&P Global Ratings believes that publication of the Bank of England's (BoE's) 2021 solvency stress test results will help inform investors and other market participants of the resilience of the U.K. banking system while the U.K. economy remains in the midst of a real-life stress scenario. The stress test, for which details of the scenario were published today, involves the eight largest U.K. banking groups, which account for around 75% of lending to the real U.K. economy.

While the BOE won't publish final results until the fourth quarter, it has unveiled a staggered timetable, including an earlier than normal submission by participating banks of projections for credit impairments and credit risk-weighted assets. This will enable desktop analysis by the BoE in the first half of the year. Moreover, the staggered information will enable the BoE's Financial Policy Committee (FPC), which focuses on systemic risk and the resilience of the financial sector, to cross-check its assumptions, and if necessary, take more proactive policy decisions.

We currently view the economic risk trend of the U.K. banking sector as negative in our BICRA (Banking Industry Country Risk Assessment). If consummated, this would lead us to lower the starting point for rating a domestically focused U.K. bank by one notch, and result in higher risk weights in our capital model. In turn, this could spur rating action on certain U.K. banks, as indicated by the current negative outlooks on five of the eight banks in the stress test.

Regulatory stress test information is a useful input into our bank analysis and a good indicator of the effectiveness of the institutional framework of the banking system. However, in 2021 we would not necessarily wait for the BoE's results before refreshing our view of the U.K. BICRA and related bank ratings for several reasons.

First, the stress test explores a macroeconomic scenario that is far removed from our economists' base case, albeit we see risks as skewed to the downside. For example, we currently assume 6% U.K. GDP growth in 2021, as the economy starts to recover from our estimated 11% GDP decline in 2020, and the unemployment rate to peak above 7% around the middle of this year. Even if the BoE stress case remains a remote prospect, we could take negative rating action if our base case (and the related consequences for bank asset quality, earnings, and capital) deteriorates materially or downside risks grow. By contrast, we could take positive rating action if our base case improves or we have greater confidence that downside risks have ebbed.

Second, we have many other important sources of information as part of our surveillance, including individual bank results, our insight into bank performance and management plans, our forward-looking views on likely systemwide credit loss estimates, and the evolution of the economy as the vaccine rollout enables restrictions to be lifted, or not as the case may be. In combination, these could enable us to review our U.K. bank ratings well before the publication of the stress test results.

One indication of our BICRA base case is that systemwide domestic credit losses will reduce to around 60 basis points (bps) in 2021, from our assumption of around 105bps in 2020, and then further improve to around 40bps in 2022. This level would still be above the roughly 15-25 bps we observed in the 2014-2019 period and our longer-term assumption of perhaps 30-40bps, indicating that the economic fallout from the pandemic won't dissipate quickly.

Finally, while the negative outlooks in the sector are all primarily driven by our system view, our bank analysis is more wide-ranging than a focus on near-term resilience. For example, bank core profitability and business models remain a key focus and a source of rating pressure across European banks. Indeed, each bank has its own idiosyncratic strengths and weaknesses. We would not rule out, therefore, rating actions for reasons other than those linked directly to the pandemic, particularly as regards individual banks.

The eight participants in the BOE stress test are: Barclays PLC, HSBC Holdings PLC, Lloyds Banking Group PLC, Nationwide Building Society, NatWest Group plc, Santander UK Group Holdings PLC, Standard Chartered PLC, and, for the first time, Virgin Money UK PLC. Acknowledging the ongoing burden on bank operations, the BoE has delayed stress testing the ring-fenced subgroups by a further year. The group stand-alone credit profiles, from which we derive hybrid ratings and holding company senior bond issuance, range from 'bbb' (Virgin Money) to 'a' (HSBC). We don't see our combined view of their capital and earnings and risk position assessments as credit negative for any of these banks, which indicates our belief that their capital positions are well adjusted to their risk profiles.

The principal aim of the 2021 stress test will be to update and refine the BoE's assessment of its August 2020 "reverse stress test" exercise. This exercise calculated the economic paths to deplete regulatory capital buffers by around 5 percentage points. It found that the banks could absorb up to £200 billion of credit losses without breaching minimum capital requirements. The 2021 exercise will use banks' year-end 2020 balance sheets. Key elements include:

  • Cumulative U.K. GDP losses over 2020-2022 to total around 37% of 2019 U.K. GDP relative to a pre-COVID projection and a cumulative fall in global GDP equating to 31% of 2019 GDP; first-quarter 2021 GDP decline is expected to be 9% in the U.K. and higher still in geographies where U.K. banks have key exposures, such as the U.S. and Hong Kong.
  • U.K. unemployment to peak at a little under 12%.
  • U.K. residential and commercial property prices to fall by around 33% between the end of 2020 and the trough of the stress.
  • A range of other key factors, including traded market risk, conduct risk, and structural changes in the economy as a result of the pandemic.

The solvency stress test is separate from the BoE's exploratory climate change stress test this year. This will examine the largest banks' and insurers' resilience to three 30-year climate scenarios, testing different combinations of physical and transition risks. The outcome should shine more light on the financial sector's preparedness.

As we have done previously, we intend to publish a detailed commentary upon publication of the BoE's final stress test outcome.

Related Research

  • U.K. Banks Face A Bumpy Road To Earnings Recovery In 2021, Jan. 11, 2021
  • Banking Industry Country Risk Assessment: United Kingdom, Nov. 17, 2020
  • Outlooks Revised On Six U.K. Banks On Deepening COVID-19 Downside Risks, April 23, 2020

This report does not constitute a rating action.

Primary Credit Analyst:Nigel Greenwood, London + 442071761066;
nigel.greenwood@spglobal.com
Secondary Contacts:Richard Barnes, London + 44 20 7176 7227;
richard.barnes@spglobal.com
John Wright, London (44) 20-7176-0520;
john.wright@spglobal.com
Fern Wang, CFA, Hong Kong (852) 2533-3536;
fern.wang@spglobal.com

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.

Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: research_request@spglobal.com.


Register with S&P Global Ratings

Register now to access exclusive content, events, tools, and more.

Go Back